With more and more resources being devoted to tax enforcement in recent years, American taxpayers are being audited with an unusual frequency. Follow these tips to avoid some common missteps that could turn the IRS auditor’s magnifying glass your way.
Big changes in the numbers you report from year to year can increase your chances of a tax audit. For instance, if your charitable giving suddenly doubles without a corresponding change to your income, the IRS may become curious about your newfound generosity.
Deductions for in-kind donations are also likely to raise eyebrows at the IRS if they seem out of line with the common-sense value of the donated items. Be sure to get a receipt for any charitable donations you make and resist the temptation to inflate the value of non-cash donations. As a rule of thumb, you should deduct only the resale value of the goods at the time of donation. A good valuation rule is to base this value on what you could get for the item in a yard sale.
Small business owners tend to face a higher risk of audits. This is especially true with home businesses, where the distinction between personal and professional expenses can be unclear.
If you claim deductions for your business expenses, take care to deduct only the costs that actually go toward operating the business. Keep careful records of your income and expenses, and consider opening separate bank accounts for business and personal use.
Claiming a home office deduction may attract auditors’ attention because taxpayers frequently claim this deduction erroneously. Simply working from home a few days a week does not necessarily qualify you to deduct your home office from your income tax. To be eligible for a deduction, your home office must be your primary workplace and used exclusively for that purpose.
What’s more, your home office is only deductible if you work from home for your employer’s convenience – not your own. Therefore, if you telecommute to work in order to stay home with the kids or save on commuting costs, you cannot claim the deduction.
If you find yourself faced with an IRS tax audit, be sure to get legal help right away. Even if you have done nothing wrong, an audit can be a complicated, stressful and potentially expensive process. An accomplished income tax attorney with strong record of success in defending audits can help you navigate the process from beginning to end.