IRS Red Flags & Tax Deduction Green Lights
By Barbara Pronin with contributions by Jennifer Pricci
The IRS audits only slightly more than 1% of all individual tax returns annually. So the chances you will be audited are slim. But, say the audit-watchers at Kiplinger.com, there are several hot spot areas on your return that can raise the chances of IRS scrutiny:
- Making too much money – People with incomes of $200,000 or higher had an audit rate of 3.93 percent, or one out of about 25 returns. The audit rate drops significantly for filers making less than $200,000, and the majority of them are conducted by mail. Of course you don’t want to earn less money. But understand that the more income you report, the more likely you’ll hear from the IRS.
- Failing to report all taxable income – The IRS gets copies of all 1099s and W-2s you receive, and their computers are pretty good at matching the forms with the income reported on your return – so make sure you report all income.
- Taking large charitable deductions – Charitable contributions are a great tax write-off and worthwhile besides. But claiming disproportionately large deductions compared with your income raises a red flag with the IRS. Be sure to keep all supporting documents, including appraisals for donations of valuable property.
- Claiming the home office deduction – This can be a great deduction if you qualify. But to qualify, you must use the space in one room of your home exclusively and regularly as your principal place of business – and you must be able to prove it. This is where the Schedule C may come in…
Deducting business meals, travel and entertainment – Schedule C is a treasure trove of tax deductions for self-employed people. But it’s also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions. BIG deductions are ripe for audit, so keep detailed records and receipts, including the nature of each business meeting or discussion as well as the need for related travel expenses.
If you are considering a Schecule C, our recommendation is to consult with a tax professional rather than attempting to file on your own as well as the very small investment in protection that may be offered by your tax preparer, such as H&R Block’s “Worry-free Audit Support” so that in the unlikely even of an audit, your Tax Agent will help you manage the process by assisting with IRS Correspondence Management, Audit Preparation, and Audit Representation. This is NOT the same thing as H&R’s “Peace of Mind” or Jackson Hewitt’s “Gold Guarantee” which covers any penalties you may incur in the event of THEIR error during any part of the filing process.
In addition, the Schedule C form, is an expensive form to file, approximately $300, as your tax preparer to go through the document and your tax deductions to see if it is even worth it to you. Obviously if your return on investment in the form will not exceed the $300 cost of the form, it is not worth taking advantage of the Schedule C.
To familiarize yourself further with the Schedule C take a look at this online worksheet. Your deductions are categorized so take some time to prepare in advance by understanding the many business activities (you do NOT need to know the codes); this will truly help you organize which expenses fall where. TIP: You do not write of gas, you write of mileage used for business purposes. The form converts that to the appropritae deduction amount.
For your interest:
For the past 7 years your contributing author, Jennifer Pricci, has been using Tara Leonard at H&R Block, Middletown to file her Schedule C forms. Tara spends a great amount of time making sure no stone goes unturned. She also educates you during the process and explores different ways to file deductions for maximum return.
Jennifer highly recommends Tara and has referred many friends and family members who have also been completely satisfied.
To schedule an appointment with Tara Leonard of H&R Block call (732) 671-9314 and tell them you were referred by Tara’s current client, Jennifer Pricci.
Senior Tax Advisor
Route 35 at New Monmouth Road (Boston Market Shopping Center)
Middletown, New Jersey
* Patrick Parker Realty offers this advice and referral for informative purposes only. Patrick Parker Realty cannot be held liable if this information results in unsuccessful tax filing or audit. Patrick Parker Realty’s ultimate advice is to consult with the tax professional of your choice.