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Tax Traps

Author: by Lena Anthony Date: January 29, 2009

Worried your tax return might be tagged for an audit? Lower your chances by following these tips:

Report everything: The first thing the IRS does when it receives your return is match the information you submitted to the information it received electronically from the institutions you did business with in 2008. "Thanks to an initiative to make tax review highly efficient, there is actually a lot of information reported to the IRS electronically," says CPA Sandy Abalos, owner of Phoenix-based Abalos and Associates (www.abaloscpa.com). "And by not passing that first test with the IRS, you’ve created the opportunity for other items on your return to be questioned."

Most underreporting is innocent, Abalos says, and frequently is caused by a lack of organization. She suggests creating a list of all interest-bearing accounts that were open in 2008, and finding a safe place to store all tax return documents as they come in. "Last year, people were moving money around a lot to make sure it was protected by the FDIC," Abalos says, "so it’s possible that you could forget all the places where your money was."

Mimic the average taxpayer: The IRS assigns each return a differential score based on how it compares to the average taxpayer. If your score is too high (or too low), you might be flagged for an audit. Before submitting your return, check to see if your deductions fall within the average range. The IRS publishes these and other tax statistics at www.IRS.gov/taxstats. If your deductions are outside the average range, make sure you have the documentation to justify the deductions and submit the proof with your return.

Follow the tax code: Abalos says a lot of her small business clients will try to deduct things that aren’t allowed because they’re using logic, not the tax code. "Taxation is not logical," she says. "In business, we make decisions based on logic and common sense, but taxation is just a bunch of rules, many of which were pulled together for socioeconomic reasons." Abalos says many of her clients try to deduct a life insurance policy, because they were required to get it in order to be approved for a business loan, but life insurance is not deductible. "They say, ‘Oh, this should be deductible because it makes sense,’ but the tax code doesn’t always make sense," she says. Another tricky area is health insurance, she says, which is deductible in different ways depending on the business entity. If you’re self-preparing and uncertain about what’s deductible, Abalos suggests consulting an expert.

Check for errors: Whether you self-prepare or hire a tax preparer, review the return for errors before you submit. "Every return that comes out of our office is reviewed by someone other than the preparer," says Abalos, who has prepared taxes for 35 years. "Prepare it, set it aside and come back to it." For a list of common errors, visit www.irs.gov/taxtopics/tc303.html.

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