Short Term Loans: Making Them Work

Even though an audit might seem like an unlikely possibility, it happens more often than you might believe. In 2012, almost 1.5 million U.S. residents were involved in an audit with the IRS. This can pose a significant problem for families, since a professional to help you through your audit can cost upwards of 100 dollars an hour.

The good news is that there are some signs you can be aware of that could raise your chances of being audited. If these signs sound like your current situation, you could possibly benefit from soliciting the services of a tax professional--or at least paying special attention to your filing and record keeping.

You Claim a Lot of Mortgage Tax

Mortgage approvals are often difficult to predict or understand. However, as a rule of thumb, most people should aim to have their mortgage cost approximately 28% of their gross income. Certain programs and situations can cause this number to creep higher, so this isn't a hard rule.

The IRS knows how much you made last year--it's on your tax return. If your situation allows you to claim a mortgage tax amount that is significantly higher than you'd expect to see using the 28% rule, you might want to consider taking precautionary measures. Careful documentation of your mortgage payments is a good idea.

You Take The Earned Income Tax Credit

The Earned Income Tax Credit is designed to assist low to moderate income families--particularly those with children. Basically, it is a credit that becomes lower as a family earns more money. It is designed to be worth less to the family than making more money would be, keeping the incentive to earn in place.

Unfortunately, this program is one of the few that the IRS acknowledges is a high risk for fraudulent claims. While it's difficult to know exactly how many cases of fraud exist, the IRS does pay special attention to this program. That doesn't mean you shouldn't claim what you qualify for--just be aware that your audit risk is higher.

You Are The 1%

For purposes of comparison, look at a theoretical family that earns $50,000. If their effective tax rate was 15%, they would owe the IRS $7,500. Based on this number, an audit of this family if they pay no taxes at all would likely yield back taxes to this level--and penalties that the family would have a difficult time paying.

On the other hand, a family that earns $200,000 at a tax rate of 20% would owe $40,000. That's why audits tend to increase in the population of people who earn a lot. If you make a lot of money, it could be in your best interests to have a professional walk you through your taxes each year as a result.

You Run a Home Business

Home businesses are tricky financial propositions. On one hand, there are a lot of things that can be deducted to help the small business owner keep their head above water. On the other hand, vehicles and home offices are often used to house guests and to take the kids to soccer practice.

That makes home business deductions and losses difficult to define. If you claim a lot of these, you're probably going to catch someone's attention at some point. Diligent record keeping and tax preparation are the key to navigating these situations with a positive outcome.

Unfortunately, most of these situations aren't things that you can directly control. That said, knowing how your circumstances could play into an audit is the key to your success. By hiring a tax preparation professional and maintaining records in advance of your audit, you can dramatically improve your chances of coming out ahead if an audit rears it's ugly head.