It’s tax time—even the employers most prone to procrastination have been legally required to send out their tax documents leaving you, the employee, to simply file. And file you must, lest the IRS come knocking at your door. While you’re likely aware that you must file, you might not know that what you’re doing is making you a target for an audit, something you likely want to avoid.
The IRS audits to make sure that everyone pays what they’re supposed to and are more prone to act if triggered by a few specific things. These don’t necessarily mean you’re doing something wrong, but you’ll have to prove that to the IRS. To avoid this hassle, follow businessman Jason Hartman’s simple tips for tax time.
First, make sure to enter the correct taxable income. This is easy to find on your W-2 and/or 1099, and the IRS will check it. Small math errors are fine and will be corrected, but numbers that are faked or estimated will certainly be caught. While you’re at it, check your entire return carefully for errors or get a tax software or accountant that will do it for you. Excessive errors tells the IRS that something is wrong.
The Home Buyer Credit, which began in 2008 has been widely used, which also means it has been widely used for evil. Claiming this credit may cause an audit, so make sure you’re correctly reporting and have not used this credit to flip a house or speculate in real estate. Keep good records and act ethically to prevent or simplify audits.
You’ll also be flagged if you report significant (large) charitable donations and show a small income by comparison. Some of these can be explained (you donated and then lost your job for a few months), but excessive occurrences are noticeable. Appraise your donated items fairly, and keep receipts.
Be careful when you claim things like dinner with clients as a deduction—be reasonable and fair. Similarly, be careful about how you claim use of your car for business. Delivering a product to clients and delivering the kids to soccer is different, so make sure you’re being accurate. Mileage records and calendar entries are good records to keep. Make sure that you’re applying the same rules to your home office, which should always be used for business purposes.
If your business loses a lot of money, you’ll also be flagged. Businesses usually make money or stop existing, so one that breaks these rules usually is asking for an IRS inspection. Expensive, fulltime hobbies are not businesses, so be careful what you’re claiming.
Finally, be as open and honest as possible. This means exact numbers and not perfectly round, nice numbers every year (red flag!). Keep good records, be honest, and you’ll likely be able to avoid an audit or minimize the trouble.
(photo credit: brianjmatis via photopin cc)