Watch Out for These Tax Trouble Areas

As you are preparing your 2006 income tax return, you need to be aware of areas that you could be using that may cause the IRS to stand up and take notice. These topics are of concern to the IRS since they provide many misreporting opportunities by taxpayers, unknowingly or otherwise. In technical terms, they are known as IRS Audit Red Flags.

Home office deductions. If you are claiming a home office deduction, be sure you meet the qualifying criteria, guidelines, and requirements set out by the IRS in order to properly claim this category. Many taxpayers claim this deduction without meeting the requirements. Hence, if you claim a large amount of deductions for your home office, you may be scrutinized by the IRS. You may receive an IRS audit red flag.

History. If you have a history of having IRS problems in the past (including audits), your tax return will be scrutinized more closely.

Preparer. If you are paying someone to prepare your tax return and they are on the list of 'susceptible tax preparers' that the IRS has, your tax return may be questioned. These individuals are known as problem preparers since they have violated the IRS laws and regulations. They have a predisposing IRS audit red flag.

Underreporting income. If you underreport income (small or large), the IRS will take notice and probably question it. The IRS has a complex system put into place that matches the information on your tax return with that received from third parties. And, whenever you receive income from a source (from a 1099, for instance) a copy of the form is sent to the IRS. Know this and save yourself some heartache.

Questionable deductions. Whenever you claim business deductions that have the IRS question it, you will be contacted. They will need to clarify what is going on.

Itemized deductions. Whenever your itemized deductions are much larger than what the IRS considers within a reasonable range, your tax return will stand out.

No backup information. If you are claiming many income or deduction items without also sending a reasonable explanation, the IRS will notice this. By including a reasonable explanation along with your tax return, you can avoid this further scrutinizing and audit red flag.

Filing status. If you are married and filing separately, this can cause discrepancies between the tax returns of the spouses. The IRS may question this.

Charitable deductions. Whenever you claim an amount for charitable contributions that is not in sync with your income level, the IRS will notice this. This is another area in which they may question you and put up an audit red flag.

Cash. The IRS will question you whenever they notice that you and/or your business receives a large amount of cash from transactions. Receiving cash in business transactions is an area that has a history of tax avoidance.

Shareholder. With all the hoopla in recent years about unscrupulous corporations, the IRS may question you if you are a shareholder of a corporation with an IRS problem history.

The best way to protect yourself from any IRS concern (and potential audit) is to, first of all, know the IRS tax laws. And, keep proper records. Explain any questionable transaction. Document everything.