1.
Not Reporting Income. The IRS
has special computer software which matches the income reported by
employers, banks, financial institutions, real estate sales, and
brokerage firms compared with your reported. If this income is not
reported the chance of an audit is greatly increased.
2. Late Filing/Paying Taxes. The failure to timely file and pay taxes results in steep penalties and interest. Returns that are filed even one day late will incur late filing penalties (and possibly late payment penalties) and increase the chance for an audit of tax returns for not only the current year but all years open under the 3 year statute of limitations.
3. Self-Employment. Working for yourself can be the best tax shelter because you can control and time your income and expenses. People who work for themselves file a 1040 Schedule C. This greatly increases the chance of audit compared to W-2 employees. If your business is typically a hobby, such as raising horses, the chance of audit increases even more.
4. Inaccurate Reporting of Stock Transactions. Keep complete and detailed records of your investments. The IRS is aware that some taxpayers make numerous daily trades online and fail to keep track of the transactions as the law requires. The IRS is finally permitting taxpayers to simply attach brokerage reports to the 1040.
5. Dealing in cash. IRS auditors are trained to search cash-based businesses to detect under-reporting of income.
6. Setting up a scam trust. The government has an ongoing list of fraudulent deals, including "family residence trusts" and some foreign trusts. Don't believe claims that you can establish a trust that allows you to avoid taxes, yet still own and control the assets.
7. Donating a car to charity and taking a deduction that's too big. Under a tax law passed in 2004, charitable donations of vehicles come under strict new rules for deductions in excess of $500. A donor's allowable write-off depends on how the donated asset is used by the charity. If it is sold, the deduction is the amount received by the charity in the sale. If the organization sells the asset without using it significantly for charitable purposes or making material improvements, the donor's deduction is generally limited to the amount of gross sales proceeds received by the charity. The fair market value of the donation, allowed under previous law, is no longer relevant.
8. Expenses and deductions unusually large. IRS computers compare your return with those filed by other taxpayers with similar incomes. If your deductions are significantly higher, you may be audited or required to prove the deduction. Of course, you should claim every deduction to which you are entitled. Nevertheless, be aware of how the audit process works and retain your tax records.
9. Deducting prohibited or suspicious items. You are not allowed to write off certain expenses, such as funeral costs and country club dues. There are other deductions the IRS is often skeptical about, such as expensive meals and home office write-offs.
10. Being a "tax protestor." Some people refuse to pay because they claim taxes are unconstitutional. The IRS loves to attack these arguments.
Important point: Even if your return is audited, remember, you do not have to perdonally attend an audit. You can stay home and designate your tax lawyer to act on your behalf.
