Thinking about writing off that "business expense"? You may want to think again. Learn which tax breaks to use, and which ones to use with caution.
by Bilal Kaiser
updated February 02, 2021 ·
April 15th is right around the corner and we all know what that means: tax time. For many, the worst fear about taxes isn't filling out the paperwork or paying what's owed, it's being audited by the IRS. So what can you do to stay off the radar? As you gather paperwork and prepare to file your personal or business taxes, keep these tips in mind to help you avoid an IRS audit.
Beware Disgruntled Employees, Exes & Neighbors
The IRS has been getting a lot of press about their whistle-blower program for good reason. It works. Informants are paid a minimum of 15% and a maximum of 30% of the amount owed by businesses or individuals. Bill Raabe, a tax expert at Ohio State University is quoted in CNNMoney as saying, “You'll have spouses—or ex-spouses probably, as well as ex-employees turning in their employers.”
Related: How to Pay Yourself in an LLC
In 2008 alone, the IRS received 476 tips identifying 1,246 questionable taxpayers, according to the article. “Many claims are for substantially more than the $2 million thresholds and involve business or wealthy individuals,” IRS Whistleblower Office Director Stephen Whitlock is quoted as saying.
Your best bet? Keep your taxes legitimate and your tax information private.
In general, you probably want to avoid deducting anything out of the ordinary, like claiming use of your entire house as a home office. And while they may feel like family, pets are not legal dependents as each dependent must have a valid Social Security Number.
Another way to avoid an audit is ensuring you don't deduct the same expense on different forms. And if there is a deduction that you think may stand out, such as a large amount spent on building repairs, offer an explanation if possible.
In terms of paperwork and documentation, do you have a record of everything? On top of IRS forms and summary reports, you'll need to substantiate deductions. This means receipts, copies of checks or other documentation that proves a deduction was a business expense.
For business expenses, the magic dollar amount is $75. If the expense is less than $75, a simple notation somewhere will be enough substantiation. However, if the expense is higher than $75, a more detailed piece of evidence is needed, such as a receipt.
Do the Math
Check your math and cross reference numbers. Does the amount of income on one form match the number on another form or a supporting document? While the IRS system corrects some minor errors, providing correct numbers and calculations is up to you.
The IRS says it can audit you up to three years after filing your taxes, though Schnepper says most audits are conducted within 18 months of filing taxes. A lot can happen in that time, so think about how you can plan ahead. This may include saving all expense receipts, logging the miles you drive for business expenses, or taking a photo of the space you claim as a home office.
Lastly, consider the services of a tax professional. They know what they're doing and can point out elements of your tax return that may get flagged for an audit. Plus, should you get audited you can look to them for help in putting together your case.
There is one bit of good news if you are selected for an audit--according to the IRS, this reduces your chances of being audited again the following year.
For more information please visit: IRS.gov