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"Don't draw any more attention to your return than you need to," says Robert G. Nath, author of The Unofficial Guide to Dealing with the IRS. "Simple, plain vanilla returns are fairly safe."
That's because most returns chosen for audit are flagged by an IRS computer program known as the discriminant function system or DIF, in official tax parlance. The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a Washington, D.C.-area tax attorney, says it's no mystery that the system is designed to screen for returns that could put more money in the government treasury.
What triggers a discriminant function red flag?
Higher incomes
Income other than basic wages, for example, contract payments
Unreported income, such as investment returns
Home-based businesses, especially when in addition to salary income, and home office
deductions
Noncash charitable deductions
Large business meal and entertainment deductions
Excessive business auto usage
Losses from an activity that could be viewed as a hobby rather than a business
Large casualty losses
Returns claiming the earned income tax credit also catch IRS eyes. The credit was
designed as a tax break for lower-income wage earners. The credit's complexity often
results in legitimate mistakes on returns. Some filers, however, have been caught making false claims to increase the payment the credit provides.
Don't cheat yourself
But don't let fear of a potential audit discourage you from filing for credits or taking legitimate deductions.
Although some tax return actions are likely to flag your return, Nath says that doesn't necessarily mean you'll be audited.
Even if your return is questioned, it's not a foregone conclusion that you'll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, Nath notes, they will be allowed.
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