While the IRS Isn’t Out to “Get” You, Audited Returns Do Share Several Common Traits
The thought of an IRS audit is stressful enough, but knowing the IRS audit “red flags” will help you in the long run each tax year. Here are more red flags that IRS looks for in tax returns.
Let’s suppose you supplement your office job with dog-walking on weekends and after work. Your tax pro will add the Schedule C attachment to your tax return. Unfortunately, the IRS looks very closely at Schedule C returns due to the high amount of small business owners in cash industries (laundromats or restaurants, for example) under-reporting actual income in order to avoid taxation.
The IRS also looks very closely at businesses that consistently take a loss year after year. Foremost in their minds is, “How can this person make a living with this enterprise if they are operating at a loss year after year?” Such businesses may be disallowed as a hobby by the IRS.
What can you do? If you have a side gig, report every cent you earn, period. $50.00 cash for taking care of your roommates arthritic and blind dog? Report it. Keep thorough and detailed records of your earnings. Same goes for expenses. If you had to buy a leash for walking your roommate’s dog, make a notation on the receipt. “Replacement leash for O’Neil account” is sufficient and will jog your memory come tax day.
If you are still worried about your return being flagged for an audit, consult a knowledgeable tax pro who can advise you regarding re-structuring your business as a partnership or corporation.
Should your return be audited, you will need to be able to account for “cash in, cash out” with supporting records such as logs and receipts. This entry on tax basics for freelancers will get you off to a good start.
Business Use of Vehicle
The IRS looks very closely at business use of a personal vehicle, especially when taxpayers claim 100 percent business of a vehicle that is in their name. If you use your vehicle for both business and personal use, keep very detailed records of business miles and personal miles, and related expenses. For example, if you’re headed to the dog park with a car full of dogs and need to buy gas, document “Gas purchase for O’Neil, Garcia, and Jae accounts” on the receipt as well as in your expense records. Same for your mileage log. Detailed record-keeping is key in the event your return is flagged for an audit.
Sketchy Tax Preparer
Maybe now isn’t the time to use your roommate’s best friend’s cousin to prepare your taxes, unless they are a certified and licensed tax pro. Beware of tax prep folks who promise you a great refund without asking for any supporting documentation. Your best bet would be to gather your paperwork and head for the door.
We Can Help
We offer both tax prep services and IRS audit defense for eligible returns. Our staff includes licensed tax pros who can represent you before the IRS in an audit or other tax matter, and we also have tax return prep pros on staff. Like our other tax pros, they are licensed and well-versed in IRS regulations and tax law.
Don’t let the thought of an IRS audit freak you out. We can help you address those concerns, and even put your mind at ease. Give us a call at (888)224-3004 or click on the white “Start Chat” button in the upper right-hand corner of any of our webpages. We’ll help you sort fact from fiction when it comes to IRS audits.