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Lots of itemized deductions. There's nothing wrong with claiming all the deductions you're entitled to, but be aware that if you have a lot, you're more likely to be audited.

Being self-employed. Filing a Schedule C ("Profit or Loss from Business" form) doesn't guarantee you'll get audited, but the IRS doesn't like to see small business show losses year after year while you have a regular job (http://tinyurl.com/IRS-hobby). Home offices are a huge red flag, as are unlikely business deductions (no, that Nintendo Wii is not a business expense).

Honesty is the best defense against audits: Save your receipts, report all your income, and don't try to fudge things. If you're nervous about getting things right, use tax preparation software or hire a tax professional. But even if you have a pro prepare your return, review it for obvious errors. For more suggestions, check out MSN Money's page devoted to avoiding audits: http://tinyurl.com/no-audit.

What To Do If You Can't Pay Uncle Sam

If you have a rough year, you may discover that you can't afford to pay your taxes. It happens. In fact, it happens often enough that the IRS has very specific instructions about what to do if you're unable to pay.

First and most important, file your tax return! Just because you can't pay your whole tax bill doesn't mean you don't have to send in the paperwork. (If you can't complete a return, then file an extension: http://tinyurl.com/IRS-extension.)

Next, pay as much as you can as soon as you can. This will reduce what you'll have to pay in penalties and interest. The IRS will then send you a bill for the balance—and will continue to do so as you make regular payments.

Finally, if you're really pinched, you can use Form 9465 (http://tinyurl.com/IRS-installment) to set up an installment agreement—a payment plan, in other words—with the IRS. They can't turn down your request for an installment agreement if you owe less than $10,000, have paid your taxes on time for the past 5 years, you plan to pay the balance in less than 3 years, and you agree to cooperate with the IRS. (You also have to pledge to pay future taxes on time.)

Tip

You can read more about tax payment options at the IRS website: www.irs.gov/taxtopics/tc202.html.

The Pros and Cons of Refunds

Every year, millions of Americans choose to have their employers withhold more than necessary from their paychecks so they'll get a tax refund at the end of the year. These people think of it as a sort of forced savings plan: If they money isn't in their paychecks, they can't spend it. Many experts hate this, and they've got some good arguments:

"You're giving the government an interest-free loan!" This may not bother you—some people like letting the government use their money for a year.

"You're cheating yourself out of cash flow!" If you get a refund, it's because you had too much withheld from your paychecks. For some, this money could make a real difference in their day-to-day lives. If your cash flow is tight and you get a big refund, you're probably better off adjusting your withholding by filing a new Form W-4. (See The Power of Positive Cash Flow to learn more about the importance of cash flow.)

"You could invest that money at a higher rate of return!" If the government has your money until you get your refund, you can't put that cash in a savings account, a mutual fund, or CD where it can earn interest.

With so many clear reasons not to get a tax refund, why do it at all? Mostly because it's a fantastic psychological trick—it's a way to force yourself to save. By having the money automatically taken out of your paycheck so you can't touch it, you can accumulate a few hundred (or even thousand) dollars every year.

I won't tell you this is a bad idea. For years, I did the same thing. I looked forward to every March because I knew that meant a big refund—which was my only form of savings. But now I save year-round, which is