If you work from home, you may owe considerably more taxes than someone who works out of the home and has taxes deducted from their paycheck. There are a lot of things you can do to lessen the chances of your tax return being audited – in this post I’ll share a few tips that are relevant to people who work from home.
- If you file using a Schedule C for profit or loss from a business, remember that the IRS is looking for you to show a profit at some point. Showing losses for more than three years could prompt an audit – the IRS will want to know if you’re running a business or a hobby – remember anything you have to spend money on to make money is tax deductible.
- Large deductions for meals, travel and entertainment are a fast way to become a person of interest with the IRS. Red flags go up everywhere whenever any of these deductions are excessively large. The reason for the 50% deduction on meals is because the IRS isn’t interested in paying for your meals – it’s the price of your client’s meal that’s deductible. And the IRS wants you to keep detailed records of the expenses. For example, the IRS wants to know where the meeting or dinner was, who attended the meeting or dinner, and what was the nature of the discussion – it’s best to write this information on the receipt. This is also true for travel – keep detailed records of the event you attended, the cost of the event, itemized (airfare, hotel, convention fees, workshop fees, etc), You can’t deduct your spouse’s travel unless they’re part of the business.
- Taking advantage of home-based offices is completely legal, but these types of returns are also at a high risk for being audited. If you’re claiming the home office deduction, be sure to keep very good records.
- Small business owners who under-report their income are targets for the IRS. The IRS is spending more time training agents on how to spot small business owners who operate cash-based businesses that may be under-reporting their annual income.
- Avoid underpayment penalties for estimated taxes, even if you pay them. This is a good way to show up on the IRS’s radar, especially if there’s a W-2 involved and you continue to owe taxes because you claim a high number of dependents.
These are the tips that apply to people who work from home, but there are many other tips in this eBook that can help reduce the likelihood of your return being audited. If your’e interested in checking out the book for yourself, you can do so here.