Tax Time Tips To Avoid Getting Audited
Nobody wants to hear from the Internal Revenue Service that your income tax return is being audited! Kiplinger’s Personal Finance magazine has put together a list of things that could get you flagged by the IRS this tax season & how to avoid it.
1. Giving a Lot of Money to Charity
The IRS knows what others who make a similar income to you tend to give, and they will question you if you’re claiming too much. Have accurate and complete documentation to prove you’ve made the donation and to prove the value of the donation.
2. Deducting Unreimbursed Business Expenses
Unreimbursed business expenses are only deductible beyond 2% of your adjusted gross income, and most workers already get reimbursed by their employers for such out-of-pocket expenses. Things like dues, license fees, subscriptions to trade journals, tools and supplies are all legitimately deductible, but things like commuting costs and everyday work clothes are not deductible. The IRS knows what is outside normal bounds based on your income and will question you if you’re too far out of the norm.
3. Claiming a Home Office Deduction
You need to have a dedicated space in your home that is only used for business to take advantage of this deduction. Doing so lets you prorate some household expenses such as utility bills, homeowner’s association fees and more on a fractional basis. Keep in mind that you’ll need to be able to prove the area you’re claiming is separate and exclusive for business use.
4. Claiming Day-Trading Losses on Schedule C
An investor is someone who buys long-term investments and holds them for a minimum of five to 10 years. A day trader is someone who cycles in and out of investments regularly based on short-term price fluctuations. The IRS knows a lot of people who try to pass themselves off as day traders by claiming losses on a Schedule C are really just investors trying their hand at something new. They’ll be on the lookout to start an IRS audit if this is the way you’re playing it.
5. Claiming 100% Business Use of a Vehicle
Salespeople can have a real problem with this one! To counter any possible IRS questions, consider keeping a paper log on the dashboard and writing down every mile for work, the date and what it was for. If you do want to claim all the costs for a business expense, be sure you have another vehicle too.
6. Not Reporting Taxable Income
You must report all 1099s and W-2s, even if you believe them to be incorrect. Remember, the IRS gets copies of all the 1099s and W-2s you receive so they know!
7. Committing Basic Math Errors on Your Return
Maybe you weren’t great at math in school but the reality is that basic math errors in adding and subtracting will raise suspicions about what else could be wrong with your return. To avoid this possible problem, use tax software and leave the math up to machine intelligence. The IRS Free File program offers free tax prep for people with incomes below $72,000.
8. Deducting Business Meals, Travel and Entertainment
The new tax law did away with the deduction for entertainment expenses. What’s left is meal deductions and travel. To qualify for the meal & travel deductions, keep detailed records.
9. Hiring a Preparer Who Falsifies Your Return
Incompetent or unethical tax preparers can cost you big time. Should the IRS see a pattern of problems on returns coming from one preparer, they may flag the entire operation’s returns for that year or the past several years.
10. Running a Business Where Almost All Money Is in Cash
The IRS has its sights set on cash-heavy businesses like taxis, car washes, bars, hair salons, restaurants and even Uber or Lyft drivers. Be careful not to fall under the attention of the IRS.
According to the IRS, audit rates increase as income increases. For example, approximately 8% of returns in the income category of $10,000,000 and above were audited which is significantly more than the 0.53% of returns that were audited in the income category of those who made between $50,000 or under $75,000.
That having been said, It’s always a good idea to play it straight with the IRS.
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