Getting audited is many taxpayers' worst nightmare, but that
shouldn't stop you from taking advantage of the tax deductions you're legally
entitled to take. You should just take care to make sure you have the
documentation you need to back up your deduction if the IRS decides to take a
closer look at your return. Below, you'll learn about three tax deductions that
often raise red flags from would-be auditors.
1. Home office
Self-employed entrepreneurs often work out of their homes, and the tax
laws provide for such businesses to deduct the legitimate expenses that are
connected with their home-based business. If you meet the requirements for a
portion of your home that's used regularly and exclusively for business use,
and is your principal place of business, you can usually prorate your overall
household expenses by the fraction of your home's total area that your business
takes up. In addition, you can deduct in full expenses that are directly linked
to your business and aren't shared throughout the remainder of your home for
Abuse of this provision has led to increased IRS scrutiny.
The most important thing to remember is that you need to be able to document
the separate area and its exclusive business use, so if your business takes up
a large fraction of your overall property, you'll need to prepare to prove it.
In addition, ensuring that all claimed expenses are business-related is
important in maintaining your credibility during an audit.
Donations to charity are usually tax-deductible to those who itemize their
deductions, and the IRS has paid increasing amounts of attention to charitable
deductions in recent years. Gifts by check are hard to falsify, but claiming
large amounts for donated items like cars or used clothing has been a frequent
area of abuse among taxpayers.
In judging your charitable donations, the IRS will compare
your deductions with those of taxpayers in a similar financial situation based
on your tax return. If you're on the high side of average, the risk of an audit
will increase, and it'll be more important for you to keep good records on what
you gave, when you gave it, and how you determined the appropriate value of the
property. Fail at any of those tasks, and you could be left unable to support
your deduction to an IRS auditor.
Most of the time, employees get reimbursed by their employers for any
business expenses they pay for themselves. As a result, the IRS looks carefully
at unreimbursed business expenses, even though they're an itemized deduction
and are only deductible to the extent that they exceed 2% of adjusted gross
Many items are potentially deductible, including dues and
license fees, subscriptions to trade journals and publications related to your
work, tools and supplies, and specialty uniforms. Yet the temptation among many
taxpayers is to try to deduct additional items that are only somewhat connected
to their jobs. Before taking this deduction, make sure the expenses you're
seeking to claim are legitimately business-related, and be prepared to explain
in an audit why your employer didn't reimburse you for them.
Finally, bear in mind that any deduction could
lead to an audit if it's unusually large compared to what most people report on
their tax returns. If you're entitled to a big deduction for any reason, make
sure you have the records to prove it in case the IRS comes knocking.
Getting audited is no fun, but as long as you have the
required documentation, you should be able to stand up to IRS scrutiny with
your deductions intact. Keeping good tax records with these three deductions in
particular is a smart move that will keep you from paying extra tax after an
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