| The work of preparing and filing your tax return is | | | | cross-verify such interest and dividend figures as their |
| relatively easier than defending your return in the event | | | | computers are programmed accordingly. Even a |
| of tax audit. Around 1.5 million taxpayers face tax | | | | single omission of dividend or interest item will |
| audit every year. There is no proven formula to | | | | immediately alert IRS. |
| avoid tax audit but you can look out for red flags. | | | | 7. Assigning your tax work to an unprofessional |
| Here are top 10 red flags which may trigger tax audit | | | | consultant – Some of the so-called |
| – | | | | ‘professional’ tax consultants will promise you a |
| 1. Unreasonable deductions for home office – If you | | | | refund without checking all your papers. In the |
| operate your business from home, you are tempted to | | | | process there may claim for some inflated or the illegal |
| deduct most of your spending as business | | | | deductions which will attract the attention of IRS. The |
| expenditure. There are specific rules published by | | | | consequences of such a mess are too serious – |
| IRS to classify business and personal expenditure. If | | | | including heavy interest and penalties. |
| you miss out on some of them, you are inviting a tax | | | | 8. The habit of rounding it up – If you have received |
| audit. | | | | a dividend of $609.49, you cannot round it up to |
| 2. Mismatching your Federal and state tax returns – | | | | $600. There are many numbers on your tax return |
| If there is a difference between the incomes declared | | | | which will not be round numbers. If your return is full |
| on these two tax returns, it will be immediately picked | | | | of such numbers, it may become ‘eligible’ for |
| up by IRS computers and you will soon get a notice | | | | tax audit. |
| for tax audit. | | | | 9. Erratic changes in your income – If your income |
| 3. High earnings – If your annual income crosses | | | | for the last year was $100,000 and for the current |
| $100,000, it may attract the attention of IRS. | | | | year you declare an income of only $20,000, IRS will |
| 4. Excessive charitable contributions – If your | | | | be suspicious about your return and would like to |
| contributions to charity range between 5 to 10 percent | | | | investigate it more. |
| of your income, IRS feel it is a good reason to ask you | | | | 10. Claiming too many tax credits – While claiming |
| explanation. | | | | credits for education, earned income or for seniors, |
| 5. Mess up in alternative minimum tax (AMT) – If | | | | people tend to confuse. It is a human tendency to |
| you are subject to AMT, you should approach a tax | | | | claim more than what you are entitled for. Naturally, |
| professional in order to avoid calculation mistakes. | | | | you pay lesser taxes then required. Finally, the hassle |
| Even if you feel to submit AMT schedule, you become | | | | of clearing this mess can be much more than the |
| prominent to attract attention of IRS. | | | | value of that wrongly claimed credit. |
| 6. Incorrect reporting of dividend and interest – | | | | If you are a disciplined to keep proper records and |
| Some people tend to ignore small amounts of dividend | | | | claim only legitimate deductions, most of these red |
| while preparing their tax return. Some people are | | | | flags should not concern you. If you are confused |
| careless about keeping a record of all the dividends | | | | about a particular item, it is advisable to take advice of |
| they receive during a year. It is very easy for IRS to | | | | a tax consultant. |