Avoidable or not?

Author: Keith Huggett

As the tax year comes to a close and you start to plan your tax deductions, talk to your tax preparer to find out what is reasonable and what is not. While the tax code allows you to claim every deduction you are entitled to, the IRS watches some more than others. Here are five audit triggers that they will, and you should, watch:

1. Unreported 1099 income: The IRS' computers automatically match your return against the 1099s that they receive. If there is a discrepancy, they will inquire about it -- usually by auditing you.
2. The home office deduction: When you claim it legitimately, the home office deduction can be extremely valuable. However, because the rules for claiming it are very complicated, many of the people who file for it are not entitled to it. As such, it is a major IRS audit trigger.
3. Dependent issues: The IRS requires a Social Security number for each dependent for a reason. They cross-reference your return against other people's returns to ensure that the same person isn't being used as an exemption twice. Given the complexity of modern families, and the relatively high divorce rate, this happens more than you expect.
4. Cash earnings: If you have a job, business or investment from which you are receiving a meaningful portion of your income in cash, the IRS thinks that you might be underreporting your income. After all, there are no real records to establish what you really received. With this in mind, an IRS audit is extremely likely if your reported income is outside normal ranges.
5. Too many deductions: The IRS compares your return against other people's returns to calculate a DIF, or "Discriminate Index Function." The more your return varies from the norm, the higher its DIF score will be, and the greater the risk of an IRS audit.