Red flag watch: Tips to avoid tax audits

April 2, 2011 at 7:01 p.m.
Updated April 1, 2011 at 11:02 p.m.

Only a few short days remain to file your taxes and the time has come to put it off no more. In the hurry to get these returns in, the last thing you want is to throw up some red flags for future audits. With the Internal Revenue Service's "Dirty Dozen" tax scam list, along with advice from various news sources and a local tax preparer, here are some tips to help avoid audits this year and get the most from your return.

1. Many taxpayers fall victim to tax preparer fraud. According to the IRS, the individual is often left holding the bag after a fraudulent preparer has skipped town with money from inflated returns after lying to the IRS and expensive fees. To avoid these dishonest people, take your business to well-known chain preparers or verify the person's PTIN, or Preparer Tax Identification Number.

2. Offshore accounts can sometimes spell trouble and alert IRS reviewers. According to MSN Money, the IRS's No. 1 audit priority has been investigating offshore account holdings, especially in tax haven countries that allow income to be hidden. If you have offshore debit or credit cards, wire transfers, foreign trusts, private annuity or insurance plans, the IRS urges you strongly to report them.

3. Any extra income totaling more than $10 needs to be reported. Whether it be interest on savings, stocks, or dividends, Terry Reyes, Jackson Hewitt's local area manager, said it needs to be declared.

"Oftentimes the bank won't send that information out until late February or March," she said. "But don't worry (if you've already filed). It can be fixed."

She recommends you immediately file an amended return to avoid a penalty.

4. Is it a hobby or self-employment? CNN Money writes that it is a for-profit business if "the gross income for any three of the most recent five years exceeds the deductions taken for the activity." The news site also advises that auditors typically look suspiciously on costly expenses versus income reported. Keep meticulous records of income and expenses. And even establish a separate bank account for the business.

5. If you or an employee is not a U.S. citizen, get an Individual Taxpayer Identification Number. Jackson Hewitt manager, Reyes, said her tax preparers can help obtain these numbers legally through the IRS.

"(Because a business has reported earnings to the IRS), employees that are here illegally will file under fake social security numbers. The ITIN will allow them to declare their wages."

The IRS states on their site that the ITIN is a way to help individuals comply with tax laws, but "does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit."

6. Don't abuse trusts. The IRS and MSN Money both advised of too-good-to-be-true trust schemes, promising you that your family or business trust will boost your income, provide personal deductions and reduce estate or gift taxes. A trusted professional should be consulted before agreeing such a trust arrangement.

7. Be careful with donation declarations. The IRS warns that they are on the lookout for donations schemes, especially "where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution."

CNN Money states that this year, the IRS is more attentive to charitable contributions.

8. Don't tell people you've one-upped the IRS. MSN Money writes that informers can earn a reward "of as much as 30 percent of the additional tax collected," when ratting out tax evaders and defrauders. Instructions on how to report such fraud can be found with the "Dirty Dozen" list on the IRS website,, and type in "2101 Dirty Dozen" in the search box.

Information compiled by GC staff



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