6 ways to keep the IRS at bay

For unearned income over $1,800, the child's tax is computed at the parent's tax rate, which can be as high as 35%. A child who turned 19 (24 if a student) in 2008 isn't subject to the kiddie tax and will pay 2008 tax at the lower rate.

If the situation is warranted, it may be appropriate for a couple to file separately. Even if the numbers are close, or it costs you more, remember that filing separately insulates your spouse (and that spouse's assets) from claims against your return. It also lowers each filer's income, potentially below the $100,000 target threshold.

Keep your money at home

A few years ago, when the IRS announced its new audit priorities, No. 1 on its hit list was "offshore credit-card users." Here's how the game was played: In its most simple form, you'd open up an account overseas with unreported income and attach that account to a credit card with the foreign bank. You'd then use the card for easy access to your offshore funds. You'd open your account in a tax haven country that allows such income to be hidden.

Not anymore.

"Our goal is simple and straightforward," Rossotti said at the time: "identify the people who may be using these offshore cards to evade paying their taxes." Start to get your house in order . . . and watch how you use that credit card.

Trust nobody

Never brag how you put one over on the IRS! Internal Revenue Service informers can earn a reward of as much as 30% of the additional tax collected. They file Form 211 (.pdf download).

If you see fraud, you can report it on the IRS Hotline at 800-829-0433.

Be skeptical

And be skeptical that there's a secret vehicle or structure that can insulate your income from tax. All of these claims have been rejected so often that if you make these frivolous return arguments in tax court, you can be hit with a penalty of as much as $25,000! The court's time is limited and valuable. You shouldn't waste it on issues that have been settled for decades.

The reason any of these tax protesters are on still on the street is the IRS's limited resources. It's only a question of time, and money. And it looks like the IRS is now reallocating its resources to directly target these scams.

Avoid 'family trust' schemes

These run the gamut from claims that if you put your income into a trust, such income is taxed to the beneficiaries of the trust, to claims that if you put your personal assets into a "business trust" they become business assets and your costs for them convert to business or investment deductions.

Ain't gonna work . . . and any claims that they do are half-truths or outright lies.

Don't mess around with 'business expenses'

Also avoid schemes that claim you can convert personal expenses into allowable business expenses just by calling them business expenses. If you're "in business," if you have a "profit objective" that you can substantiate, then the conversion potential is legal. But you really have to be "in business."

Recent IRS statistics show a substantial decrease in the percentage of returns audited. Only 1.03% of all returns filed were audited in fiscal 2007. That's more than the 0.98% audited in 2006, but well below the 1.67% audited as recently as 1996. It's simply a question of money and resource allocation. Between 1996 and 2005, the number of tax returns filed jumped from 158 million to 177 million. During the same period, the number of IRS employees declined from 114,000 to 94,000. An IRS study released in June 2008 revealed that about 16% of the total IRS work force drops out every year. It was estimated that by 2010, the IRS will lose as much as 51% of its executives and managers. But the agency has been redeploying those resources, however limited, to focus on business owners, those with investments and partnerships and those with the big bucks.

After all, $100 disallowed to a taxpayer in the 35% bracket generates $35 in additional tax as opposed to only $10 from someone in the 10% bracket. That's why 1.77% of returns with income of $100,000 or more were audited in fiscal 2007. But that's still way below the 3.21% audited back in 1996.

Updated Jan. 20, 2009

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