3 Things That Could Lead to a Tax Audit

By Markets Fool.com

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With tax season in full swing, an audit is the last thing most people want. Fortunately, fewer than 1% of tax returns will be selected for an audit. And many audits can be cleared up by simply providing the necessary paperwork to back up legitimate tax deductions.

However, there are a few things that could catch the attention of the IRS and dramatically increase your chances of being audited. Here are three things to be aware of and how to prepare if any of them apply to you.

1. Did you give away a lot of money this year?
As you'll see in a minute, the recurring theme here is information on your tax return that is out of the ordinary. This especially goes for charitable contributions. The IRS knows how generous people of varying income levels tend to be, so if you're claiming that you contributed significantly more than taxpayers with similar income, the IRS may take a closer look.

For example, according to information released by the IRS, the average charitable deduction for filers with an AGI (adjusted gross income) of $100,000 is $3,344. So if one were to claim, say, $4,500 in contributions, it probably wouldn't be a red flag, but $10,000 in contributions might be.

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The typical amount of charitable donations varies between 2% and 4% of AGI depending on income level, so as long as you aren't too far outside the normal range, the IRS is unlikely to look twice.

Now, if you have legitimate charitable contributions that are far above the normal amount, by all means, claim them. Just be prepared to thoroughly document every donation you're claiming, and you should be just fine in the event of an audit.

2. Excessive business losses and "creative" deductions
One group of people who catch the eye of the IRS are the self-employed and small-business owners. These entrepreneurs have many opportunities fudge the numbers, so the IRS pays close attention to their returns.

For example, if you take deductions year after year based on the claim that your small business is continually losing money, this could easily trigger an audit. Generally, businesses that never achieve a profit don't last long, and the IRS knows this.

Another tax break the IRS scrutinizes closely is the home office deduction. In order to legitimately claim this deduction, you need to have a room (or rooms) in your house that you use for the sole purpose of conducting your business. A computer cart in the corner of your living room doesn't count, nor does an office room that doubles as a guest bedroom.

The list goes on and on. Many people will try to write off vacations as "business travel" or claim depreciation of business assets that adds up to more than those assets are worth. The point here is that the folks at the IRS are smart. If you claim $5,000 in "business lunches" throughout the year and work in a business that doesn't typically involve much face time with clients, you're asking for an audit.

So, before you decide to get "creative" with your business deductions, bear in mind that the likelihood of an audit triples for small-business owners and tenfold for those with incomes over $100,000. That said, as with charitable contributions, if you have a large but legitimate business deduction, you should claim it. Just be aware that you're likely to get more scrutiny from the IRS, so you should be prepared to back it up.

3. Income numbers that don't match
Perhaps the easiest way to get audited is not to include all of your income on your tax return. When a company issues you a W-2 or 1099 form, that information is also sent along to the IRS.

The IRS calculates your income information based on what it receives, and if their calculations don't match up to yours, it is a major red flag.

Now, this sounds like common sense, but too many people neglect (or forget) to report certain sources of income, especially smaller ones. For example, if you have three W-2s this year for $50,000, $30,000, and $5,000, but you only report the first two, you're putting yourself at a major risk of an audit.

What to do if you're an "outlier"
There are plenty of other things you can do that will catch the IRS' attention, and most of them involve claiming tax breaks that the IRS considers out of the ordinary. However, if you qualify for one, it doesn't mean you should be too worried, so long as you can document it.

Make sure you can thoroughly back up any deductions you claim -- particularly anything large or unusual -- and you should have nothing to worry about, even if you do end up getting audited.

The article 3 Things That Could Lead to a Tax Audit originally appeared on Fool.com.

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