The chance of being audited is low – only 1% of all returns are audited, according to 2009 IRS data. Yet some things on a tax return do increase your audit risk. Here are some red flags to watch out for:
-Home business that loses money year after year. The IRS may view this as a hobby, not a legitimate business.
-Home office deductions. If you claim a high percentage of your living space as a home office the IRS may be suspicious.
-A high level of itemized deductions. Claiming $40,000 in deductions on an income of $60,000 will probably draw IRS attention.
Casualty losses out of synch with income. You can’t claim a casualty loss that’s less than 10 percent of your adjusted gross income net any insurance payments received.