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Avoid
that Audit
by Rachel Goldstein owner of Allfreelancework.com
- 1000s of freelance jobs
You
probably aren't too concerned about being selected for
an audit. Well, if you're a freelancer, avoiding an
audit should always be on your mind as you file your
taxes. Why? Because, no matter how straight you play
it, freelancers get audited much more than salaried
employees do. No - the United States IRS doesn't have
it in for independents, but the numerous deductions
that we file set us apart from other taxpayers.
So
what can you do to keep the IRS from noticing your return?
Below find hints and suggestions to keep the IRS away!
These tips are particularly relevant to those in the
US, though other tax systems may be similar -- check
with your accountant for details. And please note that
the information provided here should by no means be
used as a guide to filing your taxes! These are merely
suggested tips and hints. Be sure to seek professional
advice in taxation, as in all business matters.
Six
Steps to an Audit-Free Tax Return
1.
Be Careful With Deductions
The
IRS's favorite target is the home office deduction.
In order to qualify for a home office deduction, your
office needs to be your "principal place of business"
and used "regularly and exclusively" for business.
In plain language, this means that your home office
needs to be the place where you spend most of your time
and make the majority of your income.
You'll
also need to keep your personal life out of your home
office. For example: a trick that I heard the IRS sometimes
uses is to ask the taxpayer being audited "Do you
use your computer for 50% personal and 50% business
or 5% personal and 95% business?" If you answer
95% business, you have flunked the test -- the answer
needs to be 100% business. This example demonstrates
the strict enforcement of the guidelines for the home
office deduction. We'll talk about this more in Home
Office Deductions for Freelancers.
You
also need to keep other deductions that you want to
take to a reasonable level. Keep a receipt for all deductible
expenses, especially food, entertainment, travel, and
automobile costs. These are often the deductibles that
are most scrutinized by the IRS. You should also keep
expenses in a log, along the following information:
- The
name and location of the expense
- Amount
paid
- Date
and time
- Company
the expense was incurred for
- If
an entertainment or food expense: the person you entertained
or dined
- If
an entertainment or food expense: the discussion you
had
2.
Where You Live Vs. Your Income
If
you live in a very high-income area, but you only claimed
that you earned $15,000 that year, this is a red flag
for an audit. The IRS will want to know how you spread
$15,000 out to pay all your bills. Unless you live with
your mother who pays the mortgage or rent, there's no
way that you could survive in Aspen on this income...
and the IRS knows it!
Also,
if your income is much lower than last year's taxable
income, this IRS will wonder where you're hiding the
money, and will want to investigate.
3.
Avoid Inconsistencies
If
there are inconsistencies, the IRS will catch them.
Be sure to file the same information on your federal
taxes that you filed on your state returns.
4.
Don't Make Mathematical Mistakes
If
the IRS's computer system catches mathematical mistakes
on your forms, a person will take a look at your returns
personally. This is more attention than anyone wants
spent on their tax forms, so make sure your math is
correct before you file.
5.
File a Neat Return
I
recommend typing up or "efiling" your returns.
If your returns are hard to read, you might have to
translate your returns over the phone or in person.
6.
Report All Your Income
It
sounds like common sense, but some people are tempted
to be dishonest. Your clients must issue you and the
IRS a 1099 when you are paid over $600. This means that
the government knows what you were paid on each job.
Report the right amount on your taxes to avoid an audit.
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