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It’s tax season again. That means another round of audits will soon be scheduled for those who slipped up (or who the government thinks slipped up) on their returns. If you want to avoid this testy tax-time surprise, be aware of the following audit triggers:

• Earned income credit. A high dollar refund would prompt the Internal Revenue Service to question whether children claimed are really dependents.
• A home office. A red flag would be raised if you have high deductions in comparison to earnings, home depreciation, or withholding.
• Innacurate W2 forms. Make sure to double check your W2 forms. Glaring mistakes might make the IRS do the double checking for you.

Other red flags would be tax shelter losses and unreported income on 1099 forms. In order to avoid a tax audit, make sure to maintain accurate records. Track all of your expenses and get documentation and proof for everything. For example, if you make a large donation to a church, make sure to get a statement on official letterhead, verifying your donation. Be aware that if you make a charitable contribution of more than $250, the IRS requires appropriate documentation.

Know that not all mistakes and red flags will result in an in-person audit. If you make a minor mistake or something you reported needs a little more clarification, the IRS will usually send a paper or correspondence audit. For example, a larger charitable deduction or a large itemized deduction may result in a paper audit.

For more information on your rights as a taxpayer, visit the IRS website and click on “individuals” and “taxpayer rights.” You can also refer to the IRS video series entitled, Your Guide to an IRS Audit.

For more tax advice, see…

10 Ways to Save Money on your Tax Return

Surprise! The IRS Counts Forgiven Debt as Taxable Income

Singleton-Clarke broke new ground for future tax filers. (Photo by Kevin Allen)

An audit notice from the Internal Revenue Service can send shivers down the spine of even the steeliest taxpayer. But with a daughter entering college and hard-earned dollars at stake, Lori Singleton-Clarke decided to fight the U.S. tax collection agency on a nearly $15,000 deduction she knew she deserved. Singleton-Clarke was not upset or worried when she learned of the impending audit. “I thought somehow they didn’t have all the paperwork,” she recalls.

It was December 2006 when the 48-year-old Bryantown, Maryland, registered nurse received her first audit letter from the IRS. The missive informed Singleton-Clarke that the U.S. government was disputing a deduction she claimed for tuition paid to the University of Phoenix toward her online M.B.A. studies in 2005.

The dispute rested on several passages in IRS Publication 970, which states that educational expenses are tax deductible if they are to maintain or improve skills in your work. The IRS disqualifies educational expenses related to any program of study which will qualify taxpayers for a new career. Singleton-Clarke says the IRS couldn’t understand why a nurse would need a master’s in business administration.

Singleton-Clarke, who has been a nurse for more than 25 years, decided to fight the IRS. Meanwhile, she was completing the final year of her M.B.A. program with a specialization in health care management, and her daughter was about to enter college. Costly legal representation was not an option.

Instead, Singleton-Clarke used the letter of the law—in this case, the federal tax code—as her main defense. She would have to prove that her M.B.A. was relevant to her nursing career. Singleton-Clarke was meticulous in her dealings with the IRS. To prepare for the courtroom battle, she armed herself with multiple copies of tuition receipts, school transcripts, and annual evaluations showing that her business studies improved her performance as a nurse. She also identified specific pages in the 2005 Publication 970 that she planned to cite in court.
In November 2008, after several volleys of correspondence and a meeting with an IRS appeals officer, the U.S. Tax Court in Washington, D.C. heard her case.

Though somewhat in awe of the proceedings and personnel in attendance, Singleton-Clarke was not shaken. “My strategy was to show my undergraduate degree and the courses that I took. I wanted the court to see that I’m using my skills as a nurse, but I need that business knowledge as well.”

Singleton-Clarke’s court hearing lasted just one hour. It took until early December 2009 to find out that she won her case—a considerable feat. Only 10% of about 300 of such cases were decided in the defendant’s favor in 2009, according to Tax Analysts, a nonprofit tax news and analysis firm in Falls Church, Virginia.

Preparation meant the difference in Singleton-Clarke’s victory, says Donna Hankins, a tax expert with Hankins Associates Inc. in Oakland, California. “That’s typically where people fall very short. They haven’t prepared themselves to defend their position,” she says.

For Singleton-Clarke, the lesson was clear. “Be very respectful of the process,” she says. “No matter how frustrating it is, stay cool.”

This article originally appeared in the April 2010 issue of Black Enterprise magazine.

UNDOCUMENTED EXPENSES: “It’s more important than ever to make sure you have receipts to document your operating costs, especially if you have business losses,” says Benita Myers, an enrolled agent in Elk Grove, California. “Large losses can trigger an inquiry on your tax return.”

With the current economy, it’s likely that businesses will have significant losses to report. However, if they don’t have the receipts, they can’t deduct certain expenses.

UNPROVEN EXPENSES: Assume you’ve kept all your receipts. If your expenses involve dining and entertainment, be prepared to provide additional information, such as who attended the gatherings and what the business purposes were, says Frederick E. Davis Jr., a tax partner with the New York office of Mitchell & Titus, a member of Ernst & Young Global.

Don’t just throw in a restaurant receipt for a business lunch, he says. Instead, write the names of the other people attending the meeting, and include a description of what was discussed.

INCONSISTENT INCOME: Even if you don’t have a business loss, tax figures that are inconsistent with previous year’s numbers could raise a red flag, Davis says.  “If you make $300,000 in one year, and then make only $25,000 the next, it could raise eyebrows.”

If you did actually experience a large change in income, of course, report it. Just be sure you have written documentation to verify it.

NO MILEAGE RECORDS: When you drive a car for your business, your mileage expenses are legitimate deductions, says Henry J. Reavis, an enrolled agent in Atlanta.  “The problem is people don’t always do a good job keeping track of their business miles.”

Get into the habit of writing down your odometer reading — both before and after a trip — recording where you traveled and the business purpose, he says. Also, make sure you have your miles recorded for the entire year.

SIMPLE ERRORS: Sometimes people make mistakes such as writing the incorrect social security or employer identification number (EIN) on their returns, Davis says. Be sure to proofread everything before sending it to the IRS.

LACK OF PROFESSIONAL HELP: If you need help with any of the points above, or if you have specific tax questions, see a tax professional. And if you’re audited by the IRS, you’ll absolutely want a tax pro, such as an enrolled agent or a CPA, to help you.

“Enrolled agents (EAs) are allowed to represent people in any state before the IRS,” says Myers.  “CPAs are also allowed to represent people in their specific state.”

If you’ve got good records, and good professional help, then you have a good chance of making it through this tax season, whether you’re faced with an audit or not.