If you’re a small business owner, or even someone who handles your own taxes, here are five areas you’ll want to monitor very closely on your return:

1. Increased expenses: Most companies have tightened the belt on excess expenses, and so has the U.S. government. Be sure not to add or inflate any expenses you don’t have receipts for. It’s an instant
   red flag, especially in cases where the overall amount is significantly higher than it has been in years past.
2. Overestimating donations: Philanthropy may be the gateway to power, but it’s also something the IRS watches very closely. If the donation amounts claimed are extremely high, or — even worse — if they exceed amounts reported by a nonprofit, it could cause the IRS to question everything else on your return.
3. Miscalculations: It may sound simple, especially in the age of Turbo Tax, but be sure to double-check (or perhaps even triple-check) your math. When something doesn’t add up, it forces the IRS to dig deeper and find out where (and why) the error occurred in the first place. Besides, double-checking may reveal a miscalculation that bodes in your favor.
4. Home office deductions: More and more people are telecommuting these days, either full- or part-time. While that makes you eligible for standard deductions for costs like electricity, online access, supplies, etc., it’s also an area the IRS watches very closely, so people don’t bilk the government out of cash. Be careful not to overshoot on simple costs like stationery, phone, etc., unless you’re sure you can back them up.
5. Failing to sign the return: One of the upsides of tax services like Turbo Tax is that they ensure you go back and handle every minor detail, including approving an electronic signature, before filing your return. If you’re filing on your own (or through a third party), be absolutely sure to sign your return before filing it. It’s such a minor detail, but again … once the IRS has to follow up on an incomplete return, it only increases the chances you could be one of the unlucky taxpayers who gets audited.

The good news: Traditionally, the IRS only audits 1% of U.S. taxpayers. So the best advice is always to file promptly and honestly to avoid any type of complications.

Do you have any actionable advice for people who are trying to avoid being audited? Any other red flags we missed? Your own audit nightmare story?

Feel free to share your thoughts in the comments section below.

Source: ”Avoid an Audit:  Red Flags You Should Know,” by Glen Curtis, Investopedia, 2/10/10