How to Play the IRS Audit Game

OK. Just one more thing then, I swear, no more tax advice!

But I'd be remiss if I didn't remind you about your potential to be audited by Uncle Sam.

Granted, the odds are quite slim. Of the whopping 130.1 million personal income tax returns filed in 2003, about 1 million, or 1%, were audited. That's according to RIA, a Thomson business providing tax information and software to tax professionals.

But just because the likelihood is low, that doesn't mean you won't be selected. First, know that audit selection has nothing to do with when you file your return. Whether you extend, amend or just file your return on time, we all have an equal shot of being chosen.

There are two kinds of IRS audits. There are correspondence audits, in which the IRS sends you a letter saying something is missing or incorrect. And then there are the actual face-to-face audits in which a revenue agent, tax auditor and tax compliance officer show up at your door. The good news is that of all the audits conducted last year, only 19.3% were of the face-to-face variety.

The process is based on random selection, says Jackie Perlman, a senior tax research analyst at H&R Block. So for the most part, there is no real rhyme or reason as to why your return is chosen for an audit. But there are some items that cause the IRS to do a double-take. Let's go over some of those now.

Red Flags

If you have big differences on your return from last year, that could be a reason for an IRS agent to go over your return. So if your charitable contributions went from $2,000 last year to $20,000 this year, you might be asked to verify that number.

If you're self-employed or run a farm, your return is generally a bit more interesting to the IRS. Mainly because there is a lot more room for, well, fudging. You have to document all your expenses and related income. And many times the IRS doesn't receive notification of this stuff like it does with an individual who works for a company.

For instance, an employee receives a W-2 that reports all his income, and Uncle Sam gets a copy of that. So he knows exactly what's going on. Self-employed people may be dealing with a business, and that is difficult for the IRS to track. So you may be asked to substantiate things.