Several Types Of Claims Flag Tax Return For Audit

Although only one out of 100 personal income tax returns is audited, certain characteristics, known as audit flags, greatly increase your odds of attracting Internal Revenue Service scrutiny. Claim anything to which you are entitled on your return, tax professionals say, but if your action raises an audit flag, be sure you have the records to defend it. Eight such flags are:

Discrepancies in the income you report and what payers have reported to the IRS on forms W-2 and 1099. If the issuers have made a mistake, taxpayers should ask them to issue corrected forms.

Married taxpayers filing separately. The IRS has found that many such people do not report items consistently between the two returns.

Regular returns with sizable items that often make taxpayers liable for the alternative minimum tax. Among them: deductions for state and local property and income taxes, the exercise of incentive stock options and big capital gains.

Working in a business in which substantial cash payments are often made. The IRS tends to look at doctors, lawyers, store owners and waiters in this regard.

Being in a business that the IRS sees as needing special attention. Among roughly 100 businesses that the IRS is examining more closely are bed and breakfasts, entertainment concerns, gas stations, mortuaries, pawn shops, restaurants and bars, taxi services and used-car dealers.

Schedule F (farm) losses, particularly when the taxpayer has sizable salary income.

Claiming the earned-income credit. The IRS has found abuse in this area and tends to scrutinize claims.

Complex business or investment transactions without clear explanations.