How to Avoid Red Flags on Your Tax Return

Want to get audited by the Internal Revenue Service? Of course not.

Fortunately, only about one in 100 taxpayers actually faces this dreaded experience each year. You can reduce your odds of being one of them this tax season by knowing the red flags that catch IRS examiners’ attention--and either avoiding those items or making sure you have the proper documentation to make your claims less suspicious.

Here are some of the most common red flags, gleaned from experts familiar with IRS procedures:

Excessive red ink. Expect IRS heat if you claim deductions for small-business losses several years in a row, says Judy C. Keisling, director of tax training at H&R; Block.

IRS eyebrows also are raised when you claim business expenses that appear to be out of line with your business income.

Lots of cash income. The IRS is always wary of folks who receive large amounts of income in cash; in an audit, the agency may ask to see your bank deposit statements to make sure it’s all reported, says Sidney Kess, a New York tax attorney and CPA.

Large home office deductions. Examiners will look to see if you take deductions exceeding the income from your home office activities minus certain expenses.

Big round numbers. Claiming a large, flat amount--say $5,000--for charitable or other deductions is an invitation to hot water.

Child-care deductions lacking documentation. The IRS will look out for taxpayers who ignore the new rule for 1989 returns requiring you to provide the Social Security or taxpayer identification number of the care provider.

Improper personal interest writeoffs. The tax cops will scrutinize folks who try to deduct interest expenses on credit card or other non-mortgage loans as business expenses on Schedule C as a way to avoid the 20% limit on such deductions, Kess says.

Excessive company car writeoffs. Examiners are watching for higher writeoffs than allowed for business use of a car.

Improper miscellaneous deductions. IRS buzzers may go off if you try to deduct such items as tax preparation fees as a business expense to escape the rule limiting such miscellaneous deductions to amounts that exceed 2% of your adjusted gross income.

Casualty and theft losses. To reduce suspicion, attach evidence--insurance claims, police reports--showing the disaster and value of your property before and after; consider attaching a letter explaining what happened.

Extreme generosity. The feds are wary of charitable contribution deductions that seem unreasonably high for your income. For example, if you make between $30,000 and $40,000, the average donation writeoff is $1,005; deductions a lot larger than that could trigger suspicions, Kess says.

Also, the IRS looks carefully at non-cash contributions. File Form 8283 and consider attaching appraisals if you deduct more than $500 for gifts of art, land or other non-cash assets.

Potentially abusive tax shelters. IRS alarms go off whenever you claim writeoffs from limited partnerships investing in such things as mining ventures, movies and recordings.

Returns filed by unscrupulous tax preparers. The IRS keeps a list of preparers with track records of filing fraudulent returns. If your preparer is on this hit list, there’s a higher chance you’ll be audited.

Should you be discouraged from taking big deductions? Of course not. Just be sure you have proof.

“If you have large deductions or large casualty losses or high business expenses that you can document, don’t let that dissuade you from putting them on your return,” H&R; Block’s Keisling says. “The fact that you’re going to be audited doesn’t mean they will be disallowed.”