Ways to protect yourself from a tax audit

(KGO)
March 13, 2012 12:00:00 AM PDT
It's tax time again and the last thing you want to worry about is an audit. If you earn less than $200,000 a year, your likelihood of being audited is about 1-in-100, but those odds go up significantly for certain types of taxpayers.

Consumer Reports has important advice on how to stay under the IRS radar and avoid getting the dreaded letter that says, "We are examining your tax return." Accountant Alan Rosen says his clients tell him getting notification of a federal income tax audit can be a scary moment. "The first thing that goes through their mind is absolute panic that they're being audited. What did they do wrong? They can't believe it. There goes everything they've worked for, saved for all these years," he says.

Consumer Reports Money Adviser's Tobie Stanger says some taxpayers are more likely to be audited than others. "Taxpayers who have their own business and itemize deductions for home office, telephone, business meals, they need to be extra careful," she says. Business expenses that could be personal, like meals or travel, are one of the first things the IRS goes after. Keep a careful calendar of your business meetings and hold on to the actual receipts and not just your credit card bills. Also, if you claim a deduction for a home office, be sure it looks like an office. And, it's best if it does not double as a laundry or playroom.

"Another red flag that can attract attention of the IRS are excessive charitable donations. If you're donating 50 percent of your income, that can seem out of place," Stanger says. Again, make sure to get dated receipts. They are required for cash contributions over $250 and for gifts of goods like clothes or furniture. "You should keep your tax records for as long as the IRS can audit you, which is three years. But just to play it safe, we recommend holding them for seven," Stanger says.

Last but not least, check the math. Believe it or not, simple mathematical errors trigger most of the notices from the IRS. If you prepare your own taxes, makers of two of the leading programs, "H&R Block At Home" and "Turbo Tax," offer some level of additional help in the event of an audit. However, you may need to buy the audit protection in advance.

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