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8 Red Flags That Could Get You Audited

The 2010 audit rate represents an 11 percent increase over the year before and more than double the agency's pace just eight years earlier. With Uncle Sam confronting a trillion-dollar budget deficit, that pace may continue rising as the government works harder to collect every dollar it's owed under the tax code. To help you avoid the spotlight, here are eight IRS attention grabbers and eight IRS survival tips if you catch the tax-man's attention.

1. High incomes. According to IRS 2010 enforcement results, your chance of being audited triples once your income crosses $200,000.

2. Large itemized deductions. "Deduct every penny you're entitled to - but realize that if your itemized tax deductions are bigger than most people's at your same income level, your return may get a second look," says USAA certified financial planner June Walbert.

3. Home offices. You can only take a home office deduction if you regularly and exclusively use part of your home as your principal place of business. If your office doubles as the kids' playroom, forget about it. For details, see IRS Publication 587.

4. Missing investment income. You know those 1099 forms that financial services companies send you to summarize your interest and dividends for the year? The IRS also gets a copy. Make sure your return matches them.

5. Incomplete returns. If your return is missing a few pieces, the IRS may wonder what else you forgot. Tax preparation software can help you avoid clerical errors that raise auditors' eyebrows.

6. Business losses. "In a tough economy, business losses are more common - but they're still something the IRS likes to double-check," says Walbert. Make sure your expenses are legitimate, and that your business isn't just a thinly disguised hobby.

7. Charitable deductions. You'll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require a written acknowledgement from the charity. If you made a non cash contribution valued at more than $5,000, you'll need an expert appraisal to back up your claim.

8. Medical expenses. You only can deduct these costs to the extent they're greater than 7.5 percent of your adjusted gross income, and it's important to have detailed records. "Don't get carried away," cautions Walbert. "You can't deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries."

If you're doubtful about the decisions you're making on your tax return, consider hiring a professional. Spending some money for expert guidance today could help you avoid paying back-taxes and penalties tomorrow.

Audit survival tips

If you get a letter from the IRS, don't take it personally. "The government isn't accusing you of dishonesty, it just wants to make sure your return is accurate,"says Walbert. To get through an audit as smoothly as possible, follow these common-sense rules.

1. Know your rights. Before your audit, read IRS Publication 1, "Your Rights as a Taxpayer."

2. Be honest. Lying to the IRS can trigger heavy fines and even jail time.

3. Consider hiring help. You can be represented by an attorney who has experience in IRS audits and processes, a CPA or a federally authorized enrolled agent or tax practitioner.

4. Get organized. You'll have more credibility if you can quickly answer questions and produce what's asked of you. If you need time to get your act together, request a postponement.

5. Stick to the topic. Whether you're answering a question or responding to a request for records, only give the IRS what it requests.

6. Take notes. Keep track of the examiner's questions and your answers.

7. Be courteous. Don't be hostile. If you think you're being treated unfairly, share your feelings with the examiner's supervisor.

8. Consider an appeal. If you disagree with the auditor's findings, you might first try talking to a supervisor. You also can send a protest letter to the IRS Office of Appeals within 30 days of receiving the report.