Tax Audit Misconceptions
July 26, 2011
Terry Peltz, Director
Performance Advisors LLC
Writing Off a Home Office Makes Me an Audit Target
Many home-based businesses do not claim the Home Office deduction for fear of becoming the target of an audit. As long as you follow proper procedure (and you actually DO use a dedicated space just for business use) and document your usage of that home office, you are not necessarily more likely to get red-flagged by claiming the home office deduction. Just be sure to file the Form 8829 and attach it to your form. Attach a detailed description of the home office and what you do in it as it applies to your business.
If I Claim All of the Deductions I am Entitled To, I Will Get Audited
When the IRS systems check over tax returns, they look for returns that fall outside the parameters for a "normal" tax return. Many times, even if these result in an audit, they are "correspondence audits", or those that are most often just a request by mail for clarification for some item that need explanation. For example, you may be a very generous when it comes to charitable donations. This might trigger further review, but cheating yourself out of the deductions that you are legally entitled to makes no sense just to reduce the chances of an audit. It is your money, so don't get robbed of it.
The reality is that if you are too conservative in your deductions, you may also fall outside the norm as well, which could get you flagged for investigation also, so take advantage of every deduction that the law allows. You have nothing to lose by doing so, and cash back to gain. If you have been honest and keep good records, an audit is not something to be feared. Know your rights and stay within them.
If you are concerned about specifics of your deductions, having your return prepared by a tax professional can be a very good investment. If you ever do have an audit, they likely can do the entire audit without you even being present! They also know how to avoid the tricks and traps that the IRS teaches their auditors to get information out of you that you don't want to and are not required to divulge. They are trained to pause every so often to give you a chance to babble about something during an awkward silence that will give them clues to what you may have omitted or made a mistake on, whether intentional on your part or not. A good tax professional knows of these kinds of tactics and how to protect you from them. The auditors are often well-trained, so getting someone well-trained on your side may be a very good idea.
All Audits Are Due To Red Flag Items
The reality is that many of the audits that are performed are not for anything specific that showed up as a concern, or "red flag". Many audits are performed at random. Don't fall into the trap of thinking that since you are being audited that you are suspected of any kind of impropriety. While many audits ARE initiated because something in a tax return fell outside the parameters of a "normal" tax return, you may get audited just because chance was not in your favor this year. Never assume anything and don't go into an audit being overly nervous or concerned (unless you HAVE done something wrong, of course).
© July 26, 2011 Performance Advisors LLC All Rights Reserved