It finally dawned on me that blog posts about IRS audits may not exactly reflect the holiday spirit – but somewhere in between glasses of eggnog it also occurred to me that this is good material for formulating valuable New Year’s resolutions. With that thought in mind I’ll move on to this week’s focus for avoiding audits – the areas of your tax return that can trigger extra attention.
Charitable deductions top the charts of almost all “likely audit trigger” lists. Charitable contributions that are inconsistent with your income level are a red flag. The IRS releases information about what the US averages are (which I’ve included below). Please let me emphasize here that if you have good documentation then you should take deductions even if they invite scrutiny. That’s better than paying extra taxes . Charitable contributions of more than $250 require acknowledgement from the charitable organization, and there are special provisions for non-cash donations.
Right behind charitable giving on the IRS hit parade is the home office deduction. Historically many people who claim expenses for work at home really aren’t eligible in the first place. It’s only allowed if you use the space exclusively and on a regular basis as your principal place of business. If you’re not self employed the home office use can only be claimed if your employer doesn’t give you work space.
Next to your home, your most expensive possession is your car – again an area where the IRS often finds deception. If you use your car for your business more than half of the time you can deduct the business use. However, if you claim you use your car exclusively for business and you don’t have another car, the IRS won’t believe you. Again, if it’s legit take the deduction. Just make sure you can prove the business use.
Schedule C, the portion of an individual return that’s used for sole proprietors is another area where the IRS has had much audit success. Often the sole owner doesn’t have time to keep good records, so even without fraudulent intent can end up flunking an audit exam. The first safety tip is -- expenses in line for like-sized businesses in similar industries. If your meals and entertainment stand out from the usual that’s even worse. If your industry is one where some people do it just for fun, you have to make sure you turn a profit within a reasonable amount of time. If you don’t meet their standards the IRS will consider it a hobby instead of a business. You can still take losses, but not beyond your gains.
Gosh, you’d think I’d be done with this topic, but unfortunately more goodies to come. At least this should get you started on some resolutions and hopefully help you pay less taxes ( avoid penalties) in the New Year.