Lowering Your Odds of Facing IRS Audit

April 15th is less than a month away, which means it's tax time. And what does everyone fear at this time of the year? The IRS knocking on their door with a big bad audit. But you can take steps to try to avoid an audit this year -- and every year. Financial adviser and "Early Show" contributor Ray Martin discusses some of the common mistakes people make that raise red flags to the IRS.

Reducing the Chance of an IRS Audit

The chances that your tax return will be audited are pretty low. According to the most recent Department of Treasury data, the IRS examined slightly less than one percent of all individual tax returns, which is down from about five percent in the mid-1960s. But the chances of an IRS audit can increase substantially, depending on your income level, types of income, amount of deductions, your income earning activities and changes you have made since your last tax return was filed.

An IRS audit, while not on the list of fun things to do, is not something to be feared. If you have kept complete and accurate records of all of your deductions and have reported all of your income, you should be fine. In fact, in about 25 percent of audits, the IRS makes no changes or issues a refund.

But here is the bottom line: no one like an IRS audit and you'd want to know what can trigger an audit so that you can avoid it…right???

Audit Triggers to Avoid

Incorrect Data: The most common reason for the IRS flagging individual returns is incorrect reporting of Social Security Numbers for filers and dependants. Incorrect tax return reporting of income and taxes paid from forms W-2 and 1099 also are a sure fire way to set off IRS computers.

Filing Late: Not filing returns on time or not filing a particular year will catch up to you. Instead file a form a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns. This must be filed no later than April 15th. PLEASE NOTE: While this gives you an automatic 4-month extension, until October 15th to file your return, it does not give you an extension to pay any taxes due. Filing a proper extension does not make your return more likely to be selected for audit.

Paying Too Little: If you do not have the money to pay the taxes due, don't just send in a lesser amount without an explanation. This will trigger an IRS notice and it could also lead to a more invasive IRS review of your return. Instead, file Form 9465 Installment Agreement Request with your return. You'll still have to pay interest and possibly a late payment penalty for any taxes not paid by April 15th. However, the IRS will work out a payment plan for up to 60 months at a lower interest rate for the balance that you owe.

Math Errors: These are also high on the list of audit triggers. Using a tax professional or a computer program to prepare your return should help you avoid this problem.

Also, certain combinations, such as not reporting some gains on the sale of a home when business-use-of-home deductions were claimed on past returns will trigger an IRS flag. Also, reporting large amounts of self-employment income, typically in excess of $100,000, on Schedule C seems to get the IRS' attention. According to the IRS, often these filers load up on dubious deductions and have fewer records justifying the write-offs they claim.

And be sure to use the mailing labels and envelopes provided to you by the IRS. This will prevent another common tax filing error: sending your tax return to the wrong IRS processing center.

For more on tax audits, go to Page 2.
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