Home Business - Avoiding a Tax Audit - Continued

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Avoiding a Tax Audit | Getting Paid | Budgeting a Home Business Vacationing Away from a Home Business

2. Where You Live Vs. Your Income

If you live in a very high-income area, but you only claimed that you earned $15,000 that year, this is a red flag for an audit. The IRS will want to know how you spread $15,000 out to pay all your bills. Unless you live with your mother who pays the mortgage or rent, there's no way that you could survive in Aspen on this income... and the IRS knows it!

Also, if your income is much lower than last year's taxable income, this IRS will wonder where you're hiding the money, and will want to investigate.

3. Avoid Inconsistencies

If there are inconsistencies, the IRS will catch them. Be sure to file the same information on your federal taxes that you filed on your state returns.

4. Don't Make Mathematical Mistakes

If the IRS's computer system catches mathematical mistakes on your forms, a person will take a look at your returns personally. This is more attention than anyone wants spent on their tax forms, so make sure your math is correct before you file.

5. File a Neat Return

I recommend typing up or "efiling" your returns. If your returns are hard to read, you might have to translate your returns over the phone or in person.

6. Report All Your Income

It sounds like common sense, but some people are tempted to be dishonest. Your clients must issue you and the IRS a 1099 when you are paid over $600. This means that the government knows what you were paid on each job. Report the right amount on your taxes to avoid an audit.

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