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    How to Avoid an Audit

    Fantasy Finance

    Many of us this time of year share a common nightmare: a tax audit. This is despite the fact that the chances of finding that dreaded notice in the mail are slim—the majority of tax filers—those who earn under $1 million a year—have a less than 2 percent chance of being audited. However, just because you’re not the 1 percent doesn’t mean that you can slip under the IRS radar. There are red flags on your tax filing that can greatly increase your chances of an audit.

    [See also: Beware of the 'Dirty Dozen' Tax Scams]

    First, be careful when it comes to your deductions. The IRS looks for higher-than-average deductions in each category as a signal that things may not be right. The most common deductions that stand out as potential problems include charitable deductions that are too high for your income, over-the-top home office deductions, and egregious entertainment deductions, such as meals and gifts. These deduction categories are all legitimate so make sure you back all your claims up with documentation.

    How you make your money can also make you more likely to be audited. Two types of earners keep the IRS on its toes—the self-employed and those paid in cash. If you’re your own boss, you most likely function also as your own accountant, which means to the IRS that you have many opportunities to make mistakes, knowingly or not. And if you’re paid in cash, the IRS knows that you can more easily underreport what you earn. If you’re honest about your own accounting you can avoid that audit or if audited, escape heavy fines and fees. 

    [See also: No-Money Makeovers for Your Home]

    Selling online has become easier than ever but don’t forget, if you earn extra income from selling items you own and make a profit, make sure you report your income. Keep in mind that your selling or payment processing service, such as eBay or PayPal, is reporting sales and the IRS will notice if this income is missing on your tax return.

    Claiming losses from a rental property, investments or a past time can bring on extra IRS attention. Losses can be difficult to qualify as a deduction so make sure that what you’re claiming falls clearly into the legitimate loss-zone.

    And last, making mistakes with math or inputting numbers can definitely mean an extra look at your taxes. Double check your work and you may avoid that dreaded audit.

    Got a tax tip to share or a question? Tweet @carmenwongulric, #OnFile. 

     

    59 comments

    • stacker  •  Hartford, Connecticut  •  1 month 26 days ago
      This article is a font of mis-information. There is no way you can avoid a tax audit. A certain percentage of the cases that are audited are pulled at random by a piece of software that is not subject to how or what you filed in the way of numbers. Once that random case(s) is pulled, in you go for a audit no matter what. Yes its true the chance of your file being pulled for a audit are miniscule but there is that chance.
    • holycrap  •  Alamo, California  •  1 month 27 days ago
      Just get invited to join Barack Hussein Obama's cabinet. All those tax cheats skate free.
    • Katie  •  Katy, Texas  •  2 months ago
      The IRS should go after our congress for once!
    • outdoorsy  •  Minneapolis, Minnesota  •  2 months ago
      I am a farmer that leases my land out to hunters, get paid in cash, sometimes earn up to $14000. There is no way the IRS will find it out, never got called in on a audit. It is a safe way to avoid taxes.
      • AnthonyP 2 months ago
        Unless one of the hunters turns out to be a high level IRS employee.
      • holycrap 1 month 27 days ago
        LOL .... sure you do.
      • A Yahoo! User 1 month 23 days ago
        There's no way they will find out... until they just read your Yahoo comment! Lol! Makes me want to buy a chunk of hunting land.
    • roaming gnome  •  2 months ago
      Claiming your cats or dogs as dependents plus the kids may raise some red flags.
      • holycrap 1 month 27 days ago
        Why not. Just get them a SS#. Can't be too hard. Obama got one from Mass.
    • Daniel  •  Raleigh, North Carolina  •  3 months ago
      Im a self employed roofer who owns a small company. Because im self employed i have to pay 15% of my income to social security while being told when it comes time to draw it back it wont bethere. 27 percent for personal. So my cpa tells me im at 42%. Really!!
      Im, not the sharpest tax in the box but i wonder if this is why big companys move across seas. I rent my home, i have three trucks all under 1995s my granddaughter is 4 and lives with me. I paid 28,000 in taxes this year. Now there talking about gas going to $5 a gallon. No relief in sight but i love my country and i get up everyday to go to work. God bless America!!
      • Randy M 3 months ago
        Talk to your accountant you should incorporate and be an S corp. This will allow you to legally avoid some SE tax. Plus you can pay for health insurance and deduct as well as a company car. Contact me if you need help with this. malonetax
      • DOUGLAS 2 months ago
        Randy M is right, if you hurry you can still file your 2553 (election for S-Corp) and utilize it for this tax year. Yes, you may have to pay your CPA to do quarterly returns and possibly monthly deposits, but the money you save is well worth it.
      • Linda 2 months ago
        Does an LLC work similar to a sub chapter S Corp? ie., do the profits pass through as dividends? What is the difference?
    • Mike H  •  3 months ago
      I paid $19K in fees to Ebay and Paypal last year. I didn't get $19k in service.
      • Tom 3 months ago
        Can't you deduct that as a business expense?
      • David 3 months ago
        Yes he can. Mike, that means you took in $127,000 in sales. Sitting at your computer. What's your COGS? Your overhead has to be small. Like I said above, they are looking for tomato pickers in Alabama.
      • Tory 3 months ago
        Deductible or not. It is not so much a tax issue, as a cash issue. I think Mike is saying that Ebay may have been profitable when he was able to underreport income, but now paying the Ebay fee and the taxes, it is not profitable. My family used to run our business there as well and had close to 30k in fees from ebay and paypal. Unfortunately, our profit was a measley 10k. Not much tax to pay when you are only making 10k.
    • Mike H  •  3 months ago
      As a sole proprietor on Ebay, I have now come to realize that 15% in Ebay/Paypal fees and 25-30% in State and Federal tax is a rather unfeasible way to make a living.

      No wonder Ebay and Amazon fought the internet taxes. They were playing on a whole different level. We'll see how much of their seller base disappears after this April 15 when everyone realizes 15% in seller fees on these sites is a real milk-job.
    • jen  •  3 months ago
      If people payed every penny they were expected to there would be nothing left. Did you purchase cigarettes in another state? your supposed to pay your states taxes on those cigarettes. Did you win $20 on a scratch off ticket? The government wants that. Did you mow a few yards over the summer for some extra income? Win fifty at the casino? Receive a prize or gift worth anything? They want that too. Government for the people my #$%$
    • Duane  •  Richmond, Virginia  •  2 months ago
      Why don't politicians pay a progressive income tax on all that free money they receive as campaign donations...Maybe they would have a better understanding of all Americans and small businesses if they followed the same rules and were not above the rules.
      Just think, maybe the National debt could be paid off during this election year if all campaign donations were subject to the 15% + 38% tax that a sole propriator is forced to pay.
    • Chivo  •  3 months ago
      The best way to avoid an audit is to realize that the governance is so powerful. Therefore don't try to steal from a thief.
    • RobL  •  3 months ago
      Electronic payment processors like PayPal are only reporting to the IRS if you have 200 received payments and $20k or more in sales for the year. This article makes it seem like they are reporting everything and could be scaring people lol. Of course you should be reporting everything anyway blah blah blah
    • stephenr  •  Charlotte, North Carolina  •  2 months ago
      The first statement is UnAmerican, IRS, handing out nightmares. Our founding fathers first saw that the We The People demanded taxation through representation, although somewhere along the way We The People allowed our representation to do as their greed filled souls desired. We can cry, pout, whine, but, the truth remains, We The People must clean up our mess.
    • georgia  •  Atlanta, Georgia  •  3 months ago
      I think reporting earnings from ebay or anything else that you sale is a bunch of crap!! I'm talking about used stuff that's already had taxes paid on it. It seems that wouldnt be any of their business .
    • gitrdun  •  3 months ago
      Why should we live in fear of a Tax Audit? Sounds more like the Soviet Union than the United States of America. Taxing income is nothing more than redistribution of wealth. Picking winners and losers has become the game of choice for Washington DC.
    • Bob H  •  3 months ago
      Technically, you should probably report income from having a yard sale, but who's going to do that?
    • BurghfaninCincy  •  Trenton, Ohio  •  2 months ago
      It's "pastime", not "past time."

      Proofreading--an extinct skill.
    • Mandy  •  3 months ago
      duh, duh, duh!
    • nicejob  •  Harrisburg, Pennsylvania  •  3 months ago
      so you have to pay taxes when you buy and sell?????
    • Kassandra  •  Southfield, Michigan  •  3 months ago
      Honesty is not always the best policy. Who should be audited is the people preparing the taxes. Many of them are just putting in numbers and submit and the IRS accepts it, so when you get your return if there's a mistake that the preparer made, you're responsible, meanwhile; you call to report it and I still got Audited. And this person was a accountant. Maybe instead of becoming a RN I could!!!!!

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