In the last post, we took a look at the different kinds of tax audits. I hope that the information provided somehow alleviated any apprehensions about tax audits. After all, the most basic kind of tax audit is not that much of a big deal!
In this post, I am going to share some tips that can help you avoid a tax audit. Yes, I sincerely believe in the old saying “an ounce of prevention is worth a pound of cure.” Let’s begin with looking the groups of people that the IRS usually looks more closely at.
The bad news is that, in many cases, those who declare themselves to be self-employed are the focus of attention. Since you’re a freelance writer, there really isn’t much you can do to change your self-employed status. Still, the IRS does not pore over every self-employed person’s tax returns. What they do is take a closer look if they encounter certain factors. Some of these are:
- Home office deductions
- High earnings (according to CNN Money, the threshold is about $200,000)
- Large deductions for charity
If you know that your tax return will have one of the above, all that you can do is keep records really carefully. Make sure that all of your receipts are filed and easily retrieved if necessary.
Here are other things that you can do to lower your tax audit risk:
Don’t round off numbers
You might be tempted to round off figures to make things simpler. However, in the interest of accuracy, you’re better off indicating the exact amount – down to the last cent.
Include documentation for items that you think might be questioned
While you can’t really be sure what will be questioned or not, there are some items that you might have a “feeling” about. When in doubt, just go ahead and attach the paperwork. This will probably save you the trouble of a tax audit later on.
Check and double check your math
I am sure you already do this, but the importance of double checking the math in your tax return cannot be emphasized enough.
Use the home office as it is supposed to be
That is, set it aside for that sole purpose. You already know that home office deductions raise a red flag. If you really do have a home office, then make sure that it is justified. Your couch does not count as a home office – even if you work there the whole time.
Photo credit: rvw
This is really a useful advice for freelancers who are having a hard time when it comes to declaring income and paying their taxes. Also, I think freelancers should keep an account on all business-related expense to declare tax breaks and if this means setting aside a filing cabinet for all your invoices and receipts, do so. It helps a lot to get organized. You don’t want to mess with the IRS, cited as one of the toughest collection agency in the whole world.