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The Internal Revenue Service audited almost 1.6 million individual taxpayers in 2010. That's an 11 percent increase over the year before and more than double the agency's pace just eight years earlier. With Uncle Sam confronting a trillion-dollar budget deficit, that pace may continue rising as the government works harder to collect every dollar it's owed under the tax code. To help you avoid the spotlight, Texas-based financial services provider USAA points out eight IRS attention-getters and offers eight IRS survival tips if you catch the taxman's attention.
1. High incomes. According to IRS 2010 enforcement results, your chance of being audited triples once your income crosses $200,000.
2. Large itemized deductions. "Deduct every penny you're entitled to - but realize that if your itemized tax deductions are bigger than most people's at your same income level, your return may get a second look," says USAA certified financial planner June Walbert.
3. Home offices. You can only take a home office deduction if you regularly and exclusively use part of your home as your principal place of business. If your office doubles as the kids' playroom, forget about it. For details, see IRS Publication 587.
4. Missing investment income. You know those 1099 forms that financial services companies send you to summarize your interest and dividends for the year? The IRS also gets a copy. Make sure your return matches them.
5. Incomplete returns. If your return is missing a few pieces, the IRS may wonder what else you forgot. Tax preparation software can help you avoid clerical errors that raise auditors' eyebrows.
6. Business losses. "In a tough economy, business losses are more common - but they're still something the IRS likes to double-check," says Walbert. Make sure your expenses are legitimate, and that your business isn't just a thinly disguised hobby.
7. Charitable deductions. You'll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require a written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you'll need an expert appraisal to back up your claim.
8. Medical expenses. You only can deduct these costs to the extent they're greater than 7.5 percent of your adjusted gross income, and it's important to have detailed records. "Don't get carried away," cautions Walbert. "You can't deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries."
