5 Tax Audit Red Flags April 16, 2013My MoneyOff

Unless you filed for an extension, today you’re sighing with relief. Tax season has come and gone, sort of.

There is always the chance the IRS may have a few “questions,” and slap you with an audit.

Since it’s better to be prepared than caught with your lady garments down, former CNN and CNBC anchor and Editor-in-Chief of Recessionista.com Nicole Lapin gives a heads up on five tax audit red flags you may be guilty of this year.

Filing the old-fashioned way. Nearly 10 million taxpayers make math errors on tax returns each year, resulting in filing delays or audits.

“Simple miscalculations like putting the wrong number in the wrong box or skipping a line happen far more often when you’re filing with pen and paper instead of plugging and chugging online,” says Lapin.

Filing as a freelancer. Four million Americans underreport their income annually, often resulting in increased tax liability and additional penalties.

If a client sends a 1099 form after you’ve already filed, filing an amended and corrected return becomes mandatory.

Claiming credits you don’t deserve. “Nearly a third of all audits come from taxpayers who try to claim deductions that they don’t deserve,” Lapin says.

Reducing your income by taking too many deductions or not claiming taxable income to qualify for credits can lead to a fight you’re unlikely to win.

Mishandling rental income. “Rental property owners are required to file a Schedule E and it’s important to understand the nuances behind it,” explains Lapin. Real estate rentals tend to reflect losses due to depreciation write-offs.

“You might be tempted to take these losses on your individual tax return, but bad news: you’ll probably get audited,” adds Lapin. “To limit audit risk, you should look into forming an LLC.”

Thinking small. Small businesses with gross incomes of more than $100,000 are five times more likely to be audited than those who do not file a Schedule C. “Always have backup documentation for business expenses,” says Lapin.

Bonus PINK Link: 8 Random Tax Breaks You Don’t Want to Miss.

Have you ever been audited?

By L. Nicole Williams

Nicole is the Editor at Little PINK Book. Follow her on Twitter @iamnicwill.

“Money, like emotions, is something you must control to keep your life on the right track.” Natasha Munson

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