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To Avoid an IRS Audit, Steer Clear of These Red Flags

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Ever since the advent of email, the content of our home mailbox has become less important. Rarely do we find anything sandwiched between the mounds of multicolored junk mail we get each day that warrants our attention, the exception being wedding invitations and IRS notices.

As terrifying as the prospect of attending your second cousin's wedding might be, it's an easy fix -- send your regrets and a $50 Target gift card, and you're off the hook. However, an invitation to an IRS audit isn't something you can refuse, so it's best to never get one in the first place.

Most people will tell you they know someone who got audited by the IRS, but despite the seemingly widespread occurrence, the average American has only about a 1 percent chance of getting audited. That percentage climbs as your income climbs, with those making more than $10 million a year having a 27 percent chance of an audit -- bad news for Brad Pitt and Angelina Jolie.

But according to David Knecht, a partner at CPA-firm Milam, Knecht & Warner in Glendale, Calif., there are red flags the IRS looks for that increase your chances of an audit, no matter what your income level is, and avoiding those will help make sure you never have to look an IRS agent in the eye.

Measure Twice, Cut Once

"First," says Knecht, "double- and triple-check all your numbers. When you're inputting your W-2 or 1099 amounts into whatever software you're using, make certain they're correct.

"IRS computers have the ability to cross-check your numbers against those reported to them by employers, banks, mutual funds, stock brokers, etc.
So this rule goes for W-2s, K-1s, 1099s, 1098s and any other type of income or expense that you receive notification of from third parties."

If the IRS has 1099 information from a mutual fund or from a casino where you hit a jackpot on a trip to Vegas, and you're missing that on your return, their computers will pick it up. At a minimum, you'll get a letter from the IRS asking about the missing information. At the worst, you'll find yourself face-to-face with an auditor.

Stay Within the Norm

In the quest to lower taxes, some filers get creative with their deductions, but these will be seen as aberrations to the IRS.

For example, deducting some of your automobile expenses for business is OK, but taking a 100 percent deduction is going to draw unwanted attention. "The IRS doesn't believe that anyone has 100 percent business use of a personal auto," Knecht says.

He adds that other things -- such as deducting hobby losses, outsized charitable contributions, interest expenses, and other itemized deductions -- will most certainly raise a red flag.

What's more, most of the things you can do to avoid an audit come down to common sense.

"While there are a lot of rules governing what constitutes a legitimate business purpose and therefore deductibility," says Knecht, "a general rule of thumb is that to be deductible, an expense needs to have a reasonable connection to your business. If it can't pass the smell test, it's probably a loser.

"If you're concerned about getting audited," he says, "report everything, report it correctly, be reasonable in amounts reported and maintain your documentation, just in case."

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."


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21 Comments

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obamaliedamericadied

How to avoid Obama's IRS..?
Vote Democrat.

April 05 2014 at 6:14 PM Report abuse +7 rate up rate down Reply
3 replies to obamaliedamericadied's comment
blackbelt.ron

How to avoid a visit from Obama's IRS...?
OMG - That's Easy.....!
Do Not associate with or be a member of any Tea Party group.
If they find out you vote Conservative, you pay dearly....

April 05 2014 at 6:04 PM Report abuse +12 rate up rate down Reply
taylorz1838

I lost my job three years ago, and because of my age (54), I can't find another job in my field. In 2013, I survived by doing odd jobs for people: running errands, shopping for them, repairing things, sewing, babysitting, etc. I also used my credit cards to pay bills. I had to also move in with a roommate to save money. There are no W2's, no 1099's, and most of the time, I was paid in cash. The money was trickling in such small amounts that it never even occurred to me to keep track of it...I could ballpark it, I suppose, but my question is this: Am I in danger of getting audited or arrested if I fail to report this income accurately? At this point, I own no property, and the only thing of value, albeit insignificant value, that I own is my 2004 automobile.

April 05 2014 at 5:59 PM Report abuse +3 rate up rate down Reply
1 reply to taylorz1838's comment
BroPower

If you want an answer to your question,
you must first say
are you a Democrat or a Republican voter?
Obama's IRS is only interested in auditing one of the above.

April 05 2014 at 7:05 PM Report abuse +6 rate up rate down Reply
ibuildit48

How to avoid a tax audit? (1) report ALL your income, (2) take ONLY legit deductions and exemptions (3) don't try to CHEAT, (4) file on time.

April 05 2014 at 4:46 PM Report abuse +1 rate up rate down Reply
shishkkab0b

All you have to do to avoid an audit is not be a tea Party Member or register as a Democrat, right Libtards????

April 05 2014 at 3:12 PM Report abuse +2 rate up rate down Reply
1 reply to shishkkab0b's comment
wclark3350

Or file an honest tax return, right TBaqgger? Nixon (a Republican) was the last president to try to use the IRS to his advantage...or have you forgotten that????

April 05 2014 at 5:30 PM Report abuse -6 rate up rate down Reply
1 reply to wclark3350's comment
jrb359

Conservatives don't live in the past.

April 05 2014 at 6:33 PM Report abuse +2 rate up rate down
mariesims123

I read an article about a woman who embezzled millions from trust funds. She didn't bother to report her thefts to the IRS as income. Yep. They audited her and now they want their money---or to be honest, they want the money that really belongs to the people she stole from. Go figure.

April 05 2014 at 1:41 PM Report abuse +3 rate up rate down Reply
1 reply to mariesims123's comment
rdrvr1752

You do realize that the convicted woman has the right to claim reduction of income to the extent she pays restitution of the embezzled funds? The court orders in embezzlement cases typically order the confiscation of cash assets and sale of property acquired to provide relief for the defrauded party or parties. However, in many embezzlement cases, the funds have been dissipated and there is no practical possibility of relief. In those cases, the tax assessment is the only financial punishment immediately available. It is, after all, income to the embezzler. Again, to the extent the convicted party repays the embezzled funds, taxable income is correspondingly reduced.

April 05 2014 at 9:05 PM Report abuse rate up rate down Reply
sta5h

what a bunch of idiotic comments being made here. sure shows americans are not the brightest people; and to think we could ever look at each other without bias. what a country we live in. (Obama is the reason the crops don't grow)

April 05 2014 at 1:24 PM Report abuse -1 rate up rate down Reply
1 reply to sta5h's comment
kabube

I realized this a long, long time ago--when the idiots gave Bush Jr. and Obama second terms.

April 05 2014 at 3:00 PM Report abuse +1 rate up rate down Reply
are2900

I don't have to worry about Paying Taxes thanks To Obama . Because I don't have a Job the IRS can kiss my Ass . Not only I am living the New American Dream I am Poor & broke ...

April 05 2014 at 12:21 PM Report abuse +2 rate up rate down Reply
xxvission

Why doesn't The IRS spend more time auditing some of the fraudsters out there,Who are making a lot of cash money under the table, doing odd jobs or selling drugs, while collecting disability and food stamps, I know a few of them who are out hustling, or climbing up neighbors roofs doing roof repair, when there suppose to be disabled, one of them even owns 4 rental properties in his wifes name of course, If I know of some of these cases, I'm sure most people know of a few, which must mean there is a whole population or segment of them out there who should be paying not collecting tax money!

April 05 2014 at 12:19 PM Report abuse +1 rate up rate down Reply
1 reply to xxvission's comment
kabube

Because the IRS doesn't want to offend democrat voters.

April 05 2014 at 3:01 PM Report abuse +6 rate up rate down Reply
1 reply to kabube's comment
wclark3350

Or low-IQ types such as kabube.

April 05 2014 at 5:31 PM Report abuse -2 rate up rate down
English

If you get called for an audit, just follow IRS example, take the fifth, tell them it will take years to assemble the records. After all if works for the IRS how can they refuse you? Or tell them after you have a your party in Vegas and deduct the expenses as well as your vacation to China, you will be happy to get with them. And alway remember, Obama has set the standard that it is ok to lie to them.

April 05 2014 at 10:39 AM Report abuse +2 rate up rate down Reply