Avoiding An Audit

While few people are audited each year, there are a few things you can do to lessen your chances. Stephanie AuWerter, Editor of SmartMoney.com, has some advice.

According to AuWerter, about one percent of tax returns are audited. However, the numbers are increasing. "Last year, 1.4 million people went through this... that was a 7% increase over the previous year," says AuWerter.

One factor that can trigger an audit is your income. Even if you're paying your taxes and conducting your business legally, if you make a lot of money, you're more likely to be audited. "It's a silver lining for all the little folks out there that the chances are not as great as some of the high earners," says AuWerter.

Excessive deductions can send a red flag to the IRS as well. "The IRS knows what is the normal range for deductions based on your income," says AuWerter. Of course, be sure to put down all the deductions you have, but don't push the bar too far. That sends a signal to the IRS that your tax return look sa little fishy and it increases your chances of being audited.

One tricky area where people make mistakes are home office deductions. There are a lot of rules for these types of deductions, so be sure to go over them thoroughly before you decide to use them on your return. "A lot of people try to take these deductions when they really aren't eligable," says AuWerter. "The red flag here is if you are not self employed." If you work from home, but someone else - i.e., your company or your boss - pays you, you're not eligable for home office deductions. These deductions are meant for people who work exclusively from their home and employ themselves. "Know all the rules," says AuWerter.

Also, be sure to examine your non-cash charitable contributions with a close eye. The items have to be in good working order and you can't exaggerate their retail value. Even though you paid $50.00 for a sweater a few years ago, that doesn't mean it would sell for the full $50.00 now that it's used and you've donated it to a local charity. Your sweater may now only be worth $15.00, and that's the value that concerns the IRS.

The same goes for furniture and appliances. "At the very least, make sure you have a record of when the donation was made and what you gave," says AuWerter. If you have any record of the purchase price, keep it and be prepared to present it if you're audited. The IRS has cracked down on value inflations because people were abusing these deductions.

For more information on tax deductions and audits, as well as more personal financial advice, click here to visit SmartMoney.com.

By Erin Petrun