The top three groups targeted for by the IRS for audits are self-employers (especially sole proprietors), anyone in show business or the entertainment industry and employees with unreimbursed business expenses. Also, you are statistically more likely to be flagged if you are an independent contractor, computer consultant, real-estate agent, or belong to a high-paying profession, such as legal, accounting and medical. If you fall into any of the categories, be especially careful from the start.
For unusual deductions that you are unsure of, use Form 8275. This way if the IRS audits and disallows it, you will not be subject to penalties.
Be careful when claiming sizable deductions related to running a part-time business. Although a helpful tax shelter for your income, it also raises flags. Over 3% of the returns reported on a Schedule C in 1996 were audited. So be prepared when claiming these deductions on your tax returns. That does not mean that if you should not claim what you believe is a legitimate deduction out of concern of raising attention to your return. Simply save all documentation supporting your claims and deductions.
Report any and all income you receive a tax document for. The IRS gets copies of all these forms as well so if you don't report them, they will find out and an inquiry will be made.
Be especially careful if you've sold any stocks or bonds. The IRS receives a 1099 form indicating the sale price of your stocks or bonds. If you bought stocks for $1,000 and sold them for $4,000, you may be tempted to just claim $3,000 as a capital gain on your return. However, the IRS has a 1099 saying you sold the stock for $4,000, and would therefore view that $4,000 as unreported income. What you need to do to allow the IRS to make sense of your return is to identify the $4,000 as capital gain and back out the $1,000 on another section of your return.
If your unreimbursed business expenses are very high compared to your salary, an IRS flag may go up. Use as much detail as possible when taking these deductions on your tax return.
Be careful when taking deductions for expenses related to a home office, especially if you are an employee of a company. The rules pertaining to qualifications for deducting home office expenses have become a little less strict in 1999 so it's probably worthwhile for you to do a little investigating as to what deductions you may qualify for. IRS Publication 587, Business Use of Your Home is a good resource for researching your deductions.
Be careful when taking deductions for donations to charities. If you donate more than $500 worth of goods to charitable organizations, you must fill out Form 8283. You must use the current market value of your donations on this form, not the original cost. Requirements for charitable deductions can be found in the IRS publications No. 526, Charitable Contributions, and No. 561, Determining the Value of Donated Property.
