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Avoiding audits for Massachusetts tax filers

Tax filers in Massachusetts, as across the nation, are once again gathering W-2s, tracking down receipts and counting off deductions as we approach the deadline of April 15 to file our federal income taxes. As the wise sage Benjamin Franklin once quipped, "nothing is certain but death and taxes: but at least death doesn't get worse every year."

Audits are to be avoided at all costs, and below are some tips to avoid the taxman knocking at your door. The chances of a random audit are only about one in 100, but those odds shoot skyward in households who earn more than $200,000 per year, increasing to one in 30. Millionaires stand a one in nine chance of having their returns scrutinized.

To avoid being one of the chosen, avoid these common red flags.

Alimony is a valid deduction for the one who pays and is considered taxable income for the one who receives it. Internal Revenue Service officials have begun cracking down on reporting alimony payments as income and increasing their review by comparing the filings of the payer and recipient to insure they match up.

The rules for deducting alimony are complex and do not include child support, so don't try that trick either.

The under-reporting of income is another area where agents will examine your return more closely. Remember that for each 1099 and W-2 that you receive, the IRS also gets a copy. Best rule of thumb is if you earned it, no matter how small, report it.

Owners of small businesses, especially those that do a high volume in cash sales, have become a special target for auditors. Agents receive specialized training to learn tips for auditing businesses dealing primarily in cash. The agency focus has shifted away from larger corporations and now is zeroing in on LLC's, S-Corps, sole proprietorships and partnerships. Don't give them any ammunition by under-reporting your annual income.

Creative deductions can almost guarantee you an audit. While courts have ultimately ruled in favor of allowing deductions for things like sex-change operation expenses, deductions for moving your pet, music lessons and even cat food, consider the trauma of a court challenge and resulting scrutiny to the rest of your return when claiming the more outrageous deductions.

Your divorce attorney can be a source of information regarding complying with alimony reporting.

Source: Wicked Local Halifax, "Investors, plans & money: That time of the year" Bill Harris, Apr. 01, 2014

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