Beware: The rate of audits by the IRS rose 20 percent in 2005. Fortunately, three steps can help minimize your chances of hearing from the IRS's enforcement division, says Steven T. Merkel, vice president of portfolio management at Naples, Florida-based Financial Advisory Consultants.
- Stick to business. "Claiming a home office is one hot button," says Merkel. To avoid scrutiny, he advises consulting an accountant on whether your home office qualifies and what the appropriate deduction is.
- Strive for the ordinary. Within each income bracket, the IRS looks for returns that deviate from the norm. Says Merkel, "If the average person making $100,000 has a business deduction of $8,400, reporting double that figure is a red flag."
- Don't underestimate income. Leaving out a 1099 or forgetting to include a capital gain invites scrutiny, says Merkel. "They look closely at whether the information on the return matches the information reported by everyone from employers and clients to financial institutions."
Those who are self-employed or work in fields where fees are often paid in cash are more likely to be audited. "Keep great records, especially for things like meals and travel expenses, mileage deductions, and charitable contributions," says Merkel. "Be able to substantiate everything you've claimed."