Stop Waving that Red Flag at the IRS

Guest post by Derek Goodman of Inbizability

Plan Ahead to Avoid an Audit

Audits are unfortunately more common than many taxpayers think, but there’s some good news. For starters, the majority of audits are correspondence-only, and are usually easy to resolve without ever speaking to an agent in person. Plus, many audits are easily avoidable, but just as Time points out, the American tax system is notoriously complicated. Knowing what the biggest red flags for the IRS are can help you either avoid them or document them in such a way that you won’t be moving to the top of the to-audit list.

Think of your taxes as a financial picture, especially when it comes to deductions. Tax professionals will often tell taxpayers that they’re not getting their maximum refunds, largely because of confusion, intimidation by the tax system, and sometimes sheer laziness. Sometimes, unfortunately, you might be doing things to draw attention from the IRS, too.

You want to ensure you’re getting the best bang for your buck and not waving a bunch of red flags around, start with these tips from My Financial Zen.

Hey, IRS, Look Over Here!

One of the biggest red flags is indeed home office deduction and related expenses (home WiFi, electricity, and so on). Of course, there are a multitude of very legitimate home offices. However, you can’t write off your entire monthly rent or mortgage. The rule of thumb is $5 per square foot of your home, and that can include the garage and attic for business-related storage needs.

Some people try to write off their entire mortgage/rent and might even get away with it for a while. However, home office deductions can be taken advantage of, and the IRS knows this. If you do get audited and have to pay back the equivalent of three years of mortgage/rent payments, that’s going to be a big hit.

Sadly, another red flag is if you give a lot of money to charity. It’s long been a go-to means of lowering taxable income for the very wealthy and it certainly makes you feel good to boot. Again, if you’re giving legally and keeping documentation, you’ll be in the clear. Make sure you only donate to 501(c)3 organizations in the U.S. (if you’re after that deduction) and that you have proof from the organization. If you give cash, pay by check. That’s one of the toughest ways of giving to fake.

Going for a Free-for-All

A lot of business-related expenses are definitely deductible—but only to two percent of your adjusted gross income (AGI). In many cases, if you have an employer and aren’t self-employed, your employer is probably already reimbursing you and the IRS is aware of this. It won’t be hard for an employer to prove that they paid you back for the time you picked up the tab for everyone’s morning coffee at the conference. Plus, “employees” (not the self-employed) can’t deduct daily commute expenses and other details.

The IRS doesn’t appreciate those who utilize digital currencies, especially if you have an income over $200,000 for singles. This is one of the most-flagged types of returns, for the reason you suspect: Digital currency is relatively new territory.

Tools and Expertise Make a World of Difference

Before it’s time to file your taxes, you’ll have several tasks that you need to take care of as a business owner. For instance, if you don’t have your EIN handy — or don’t have one yet — it’s time to check this important item off of your to-do list. An EIN identifies your company to the IRS, tracks your payroll taxes, and is needed to hire employees. You might be wondering “Where can I find my EIN number?” Fortunately, this is a simple and easy process if you go through an online service, especially if you still need to apply for one.

Your EIN is just one of the many tools that can help you at tax time. Especially for small business owners, sole proprietors and contractors/freelancers, there’s a bevy of deductions and write-offs out there from a portion of mortgage and utilities for home offices to reasonable yearly purchases of electronics. Don’t forget those business miles driven and coffee when meeting with clients, too! Thankfully, tracking your expenses is super simple these days if you use an app like Expensify or Concur Expense. Making things easy on yourself will make your taxes straightforward, too.

And of course, the best thing you can do for your tax situation is to connect with a professional accounting service. Rather than trying to navigate the government’s red tape and legalese yourself, let the experts tackle it on your behalf.

Transparency, honesty, and as always keen documentation is the secret to avoiding IRS trouble. With these tips and resources, you can ensure that your business stays in good standing with the government.

image courtesy of memyselfaneye on pixaby

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Ladybug Collaborative Inc

We bring clarity to personal financial management by providing the most accurate snapshot of your finances. Clarify * Simplify * Equip

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