Unreimbursed Business Expenses

Unreimbursed business expenses are only deductible beyond 2% of your adjusted gross income, and most workers already get reimbursed by their employers for such out-of-pocket expenses. If you do not get that reimbursement, things like dues, license fees, subscriptions to trade journals, tools and supplies and specialty uniforms are all legitimately deductible.

The gray area here is when you get into deductions for non-allowable like commuting costs and everyday work clothes. Again, the IRS knows what is outside normal bounds based on your income and will question you if you’re too far out of the norm.

Unusually High Deductions

Whether a deduction is uncharacteristically high based on your history, or if a deduction stands out as unusually high for the industry you’re in, the IRS takes an interest in unusually high deductions. They may ask you for an explanation if a deduction you claim is high (proportionally) compared to the same deductions claimed by others in your industry.

Home Office Deductions

The Home Office deduction which was simplified for tax years 2014 and forward is near the top of the IRS list of audit triggers.  You now have the option to take $5 per square foot of office space up to 300 square feet. That sets an effective limit of $1,500 on the claim, but those who keep excellent records and can show greater expenses might choose to itemize their interest, rent and other expenses on Schedule C.

Business Use of a Vehicle

Reporting business use of a vehicle binds you to extensive record keeping. Every mile of every trip must be reported in detailed logs. Expenses for insurance and maintenance are not allowed.  These expenses are considered as Actuals if you use the IRS standard mileage rate. You can only select one or the other, however, not both.  The IRS will take a close look at vehicle use, because it has been so frequently abused in the past.

Be careful, salespeople! To counter any possible IRS questions, consider keeping a paper log on the dashboard and writing down every mile for work, the date and what it was for. If you do want to claim all the cost for a business expense, be sure you have another vehicle too.

Claiming Losses on Rentals

There are strict rules and increasingly strict enforcement of the rules for reporting rental losses. To claim rental losses, half or more of your working hours and not less than 750 hours per year must be spent directly involved in developing, brokering or acting as landlord over your rental properties.

If you work a regular job, claiming a loss on rental properties can certainly get your return pulled for a closer look. The IRS has been aggressive and successful with claims of this kind in recent years. Just be sure you qualify before claiming such losses.

Business Travel and Entertainment

One of the most abused deductions frequently scrutinized; travel expenses must be well documented and must be sensible and proportional to the business. Claiming a large, out of the ordinary deduction for travel and entertainment will likely prompt the IRS to take a second look.  

Charitable Contributions

Charitable Contributions make the list every year, so document everything. Get appraisals for donated property. File Form 8283 for non-cash donations of $500 or more. Also, be sure that your charity is eligible for tax-exempt donations, and obtain a signed and dated donation receipt.  Please document the donated items.  

Loss from a Business which may be deemed a Hobby

While you must report income from a hobby, you can’t claim losses from a hobby. For the purpose of claiming a loss for a business, you must demonstrate that your activity generates a profit in 3 out of 5 years (2 of 7 for horse breeding).  Otherwise, this business may be deemed a hobby by the IRS and all of your deductions would be rolled back for each year claimed as a loss.  

Failure to Report Income | Inaccurate Income

The IRS receives all of the 1099s and W2s from your employers.  You simply must report that income or risk closer scrutiny. If you receive a W2 or 1099 that is not accurate, have it corrected.

Unreported Income from Digital Currencies

The IRS is looking for people who fail to report income from cryptocurrenices.   In the most extreme situations, failing to report crypto income can result in fines of up to $250,000 and prison time.

Income Level

Your income level plays a key role in how closely the IRS looks at your return.  Lower income taxpayers get scrutinized on mileage.

Less than 1 in 100 people filing returns on income less than $200k, faced an audit last year, compared to just over 3% of persons reporting income over $200k. Among those reporting at least $1 million in earnings, 1 in 9 were audited.

The more you earn, the more likely you need the depth of knowledge found within Anytime Tax Service. If you have a complex return, high income or both, you should explain your exact situation and get the appropriate tax and consulting assistance.

Committing basic math errors on your return

Each year the IRS receives manual returns that have basic math errors in adding and subtracting.  This raises suspicions about what else could be wrong on your return. The solution is simple: Use a license tax software product that utilized machine intelligence and receives daily if not weekly software updates.

Filing a Form 5213

Form 5213 ask the IRS not to audit you for the first five years of your business. The most common scenario where it’s used is when someone is trying to transition their hobby into a legitimate business. However, once the five-year window is up, the spotlight is going to be on you with renewed intensity.

Hiring a preparer who falsifies your return — without your knowledge

Incompetent or unethical tax preparers can cost you big time. Should the IRS see a pattern of problems on returns coming from one preparer, they may flag the entire operation’s returns for that year or the past several years.  If an egregious error is discovered, it will be on you the taxpayer, not the tax preparer.

Thoroughly vet your tax preparer before hiring them.

In Summary

Don’t be afraid to claim what is rightfully yours. Be aware of the requisite restrictions, limitations and qualifications needed to be audit-proof – especially when claiming deductions that are known to result in close IRS scrutiny.

The best advice is to review your unique situation with us. As your return grows more complex and/or your income level rises, this becomes even more important.