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Watch for Red Flags That May Get You Audited

With a growing federal deficit and pressure from Congress, the number of audits from the IRS are increasing--could your tax return be at risk?

The IRS says that individual income tax returns that report higher adjusted gross incomes were likely to get closely examined and small business owners, either as a partnership or a Schedule C filer reporting self-employment income, are always prime targets, Bankrate.com reports.

So how does the IRS select the returns to audit? One way is its use of a computer-scoring system known as the Discriminant Information Function, which it uses to evaluate tax returns based on IRS formulas. DIF is based on tax deductions, credits, and exemptions with standards for taxpayers in each of the income brackets, Bankrate.com reports. The actual scoring formula the IRS uses is top secret, however.

But here are some possible red flags that may alarm the IRS’ DIF, according to Bankrate.com:

- Home-based businesses, especially when in addition to salary income, and home-office deductions.
- Income other than basic wages (for example, contract payments).
- Unreported income, such as investment returns.
- Large business meal and entertainment deductions.
- Excessive use of a car for business.
- Losses from an activity that may be considered more as a hobby than a business.

Read more about red flags for tax audits at Bankrate.com.

Source: “Red Flags That Tempt the Tax Auditor,” Bankrate.com (March 31, 2011)
Published Saturday, April 02, 2011 11:06 AM by Blair Webb

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