7 last minute tax moves to keep Uncle Sam on your side

This post was written by elisa cundiff, outreach coordinator on March 5, 2009
Posted Under: Other

This post is courtesy of the LendingTree.com Smart Borrower Center.

The IRS isn’t your enemy. Think of it more as a sleeping giant that you don’t want to awaken.

The bureaucratic behemoth processes 220 million returns every year, and just 1.2 million – or less than .6 percent – get audited.

There are ways to decrease your chances of disturbing the grumpy Goliath, and steps you can take now to protect yourself if you do find yourself in its sights. A few tips for this tax season:

1. Don’t Differentiate yourself
The IRS applies a double-secret mathematical formula to every tax return to arrive at a DIF (discriminate function) score, which analyzes how your reported deductions and expenses compare with the national average for taxpayers in the same tax bracket. Those with high DIF scores are likely to get audited. For example, if you make $40,000 a year and report $15,000 in mortgage interest, you’re going to stand out.

2. Neatness counts
Sloppy handwriting can actually get your income tax return kicked out of the big pile for a closer look. Consider preparing your return via computer program, rather than by hand. Other common mistakes that can get you noticed, in a bad way: forgetting to sign your return, filling in social security numbers incorrectly, careless mathematical errors. You’ll also want to make sure that the numbers on your W-2s and 1099s are identical to what you report on your return, as the IRS has stepped up its document-matching program in recent years.

3. Every penny counts
A nickel here, a quarter there, and pretty soon you’re talking real money. Do not round off your deductions to the nearest dollar, or the IRS will think you are estimating your expenses. Be exact.

4. You can be too rich and too generous
You can never be too rich or too thin, or so the old saying goes. But when it comes to the IRS, you can earn too much and give too much to charity. Audits of taxpayers reporting incomes over $200,000 increased by 18 percent in 2006, according to the General Accountability Office. And, if charitable contributions exceed 10 percent of your income – regardless of what it is – it can set off all kinds of alarm bells.

5. Make an “S” of yourself
Your chances of being audited roughly quadruple if you file a Schedule C, which is used to report profits or losses for the self-employed. If you work for yourself, talk to a lawyer or tax adviser to see if it’s worth operating as an S corporation – rather than a sole-proprietorship – to avoid the Schedule C entirely.

6. Beware the AMT
Know whether you are subject to the troublesome Alternative Minimum Tax, especially if you’re in the high-risk group of upper-middle class taxpayers. A professional tax preparer can tell you, as will most tax preparation computer programs. You also can determine if you should be paying the AMT by going to www.irs.gov, typing in keyword “AMT” and using the calculator provided there.

7. Save paper
Don’t be afraid to take the deductions that you are entitled to, but do attach copies of your proof – such as receipts and cancelled checks — to your return, and keep originals for at least four years. Even if the proverbial sleeping giant awakes, you’ll rest easier knowing you can back up your claims.

(In the interest of not angering the IRS (or our attorneys) we’d also like to remind you to consult your tax advisor before making any tax related decisions.)

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