Avoid That IRS Audit
by Rachel Goldstein
You probably aren't too concerned about being selected for an audit. Well, if you are a freelancer, avoiding an audit should always be on your mind as you are filing your taxes. Why? Because, no matter how straight you play it, freelancers get audited much more than salaried employees do. No - the IRS doesn't have it in for independents, but the numerous deductions that we file set us apart from other taxpayers. So what can you do to keep the IRS from noticing your return? Below find hints and suggestions to keep the IRS away.
The IRS's favorite target is the home office deduction. In order to qualify for a home office deduction, your office needs to be your "principal place of business" and used "regularly and exclusively" for business. In plain language, this means that your home office needs to be where you spend most of your time and make the most of your money. You will also need to keep your personal life out of your home office. For example: A trick I heard of that the IRS sometimes uses is asking the taxpayer being audited "Do you use your computer for 50% personal and 50% business or 5% personal and 95% business?" If you answer 95% business, you have flunked the test because the answer needs to be 100% business. This example demonstrates the strict enforcement of the guidelines for the home office deduction.
You also need to keep other deductions that you want to take to a reasonable amount. Keep a receipt for all deductible expenses, especially food, entertainment, travel, and automobile. These are often the highest targeted deductibles by the IRS. You should also keep expenses in a log, with the following information included:
a. Name and Location of Expense
b. Amount Paid
c. Date and Time
d. Company Expense was incurred for
e. If entertainment or food: Person you entertained or dined
f. If entertainment or food: Discussion you had
2. LOW INCOME
If you live in a very high-income area, but you only claimed that you earned $15,000 that year, this is a red flag for an audit. The IRS will want to know how you spread $15,000 out to pay all of your bills. Unless you are living with your mother who pays the mortgage or rent, there is no way that you could survive in Aspen with this income, and the IRS knows this. Also, if your income is much lower than last year's taxes income, this IRS will wonder where your are hiding the money.
If there are inconsistencies, the IRS will catch them. Make sure to file the same information on your federal taxes that you filed on your state returns.
4. MATHEMATICAL MISTAKES
If the IRS's computer system catches mathematical mistakes on your forms, a person will take a look at your returns personally. This is more attention than anyone wants spent on their tax forms. Make sure that your math is correct before filing.
5. MESSY RETURNS
I recommend typing up or e-filling your returns. If your returns are hard to read you might have to translate your returns over the phone of in person.
6. REPORT ALL INCOME
Sounds like common sense, but some people are tempted to be dishonest. Your clients must issue you and the IRS a 1099 when you are paid over $600. This means that the government knows what you were paid. Report the right amount on your taxes to avoid an audit.
If you follow the above guidelines, you have done everything that you can do to avoid an audit. As long as you keep your receipts, you will do fine if you are unlucky enough to get audited.