It’s that time of the year again. Don’t let the government shutdown fool you—the Internal Revenue Service and its computers are up and running.
Whether you’re looking forward to a refund or dreading a tax bill, most of us will be dealing with the IRS in one form or another. No matter which camp you’re in, it’s safe to say that nobody wants to be the subject of a tax audit.
How Does the IRS Decide What Returns to Examine?
If you’re wondering how the IRS determines which returns to examine, you’re in luck. The Department of the Treasury provides us with an overview of the process in Publication 556.
Some audits are done at random, but others are based on how your return “scores” according to a secret algorithm that the IRS uses to the items on your return. Here, like in golf, lower scores are better; a high score means you probably have an error on your return. Errors mean audits.
Because the Internal Revenue Code is massive and confusing, there is plenty of misinformation floating around about “tricks” to save you money on taxes. Before you start piling up those questionable deductions, it may be worth asking a professional for a second opinion.
“Tax-Saving Tricks” to Avoid
Filing false information or omitting details could lead to more assessed taxes, hefty penalties or even jail time. While the following is by no means an exhaustive list, here are three “tax-saving tricks” that you might want to avoid:
Home Office Deductions
For many of us, the workday doesn’t end when we leave the office. If you bring your work home with you, then it’s possible that you qualify for a home office deduction.
Unfortunately, lying on the couch and sending a few emails on a Saturday probably doesn’t qualify your living room as a home office for tax purposes. Publication 587 details the requirements for the home office deduction and even includes a handy flow chart. Because most people don’t qualify for this deduction, including it on your return is likely to draw attention.
Meals and Travel Deductions
Recent changes to the tax code have eliminated business expense deductions for entertainment and recreation, but the meal deduction is still intact (for now). Excessive meal or travel deductions are likely to raise a red flag on your return.
If you plan to deduct meal or hotel expenses on your taxes, be sure to keep proper documentation to prove it was business-related. Under the new rules, if your deduction is considered an “entertainment expense,” it will probably be disallowed.
Not Reporting All of Your Income
Another way to increase your risk of an audit is by omitting income. You may be trustworthy, but when it comes to tax return accuracy the IRS doesn’t rely on the honor system.
The IRS compares your return information to reports gathered from third parties (such as W-2 and 1099 forms). If the numbers don’t match, then your chances for audit are increased.
Can Bankruptcy Help with Tax Debt?
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If you are considering a bankruptcy option and need assistance please contact one of our locations nearest you for a free, confidential consultation with one of our experienced, licensed attorneys.