Detail your expenses to avoid IRS audit

Q. Because of medical expenses, our family will have unusually high deductions on our 1998 tax returns. What can we do to avoid a potential audit by the IRS? Name withheld, New York

A Even if your expenses are legitimate, they could be large enough related to your overall income as to trigger an audit, says Ed Slott, a CPA based in Rockville Centre, N.Y.

Mr. Slott suggests that you attach documentation to your return explaining the reasons for the expenses. The same approach applies for taxpayers with high casualty or theft losses, he says.

In his book "Your Tax Questions Answered" (1998 Edition, Plymouth Press), Slott recommends using specific dates when providing documentation.

Incidentally, other areas that could flag an audit, according to Slott, include unreported income, phony dependents, sloppy returns, and financial losses that may be linked to a hobby, not a business expense.

Q. I know nothing about mutual funds.I am sure there is basic information available for people such as myself. Where can I write for information? O.S.E., Pittsburgh, Pa.

A. Write to the Mutual Fund Education Alliance, a trade group, at 100 Northwest Englewood Road, Suite 130, Kansas City, Mo., 64118, or visit their Web site at www.mfea.com.

Most mutual-fund companies also provide free literature on mutual-fund basics. As these columns have often noted, you do not need a lot of money. Some companies, T. Rowe Price (800-225-5132), for example, will let you invest with as little as $50 per fund per month.

Q. When you cash in savings bonds, a large chunk will go right back to the US in the form of income taxes, especially for older bonds. How can you minimize this penalty? F.S., via e-mail

A. "Your options are limited, but one crucial factor that you have is timing," says Gary Schatsky, a fee-only financial planner in New York.

"Don't cash in your bonds simultaneously," he says. "Spread out the redemptions so that you don't increase your aggregate tax-bracket."

Finally, "cash in bonds in years when your income dips," he says. That way, you may be able to use a lower tax rate.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com