Just because tax season’s deadline is approaching doesn’t mean you should rush through your tax return. The less time you spend making sure your return is filed correctly, the more likely it is that the IRS may want to audit you.
We understand that filing your tax return can cause stress. After all, it requires time, patience, and a comprehensive understanding of the latest tax codes. But if you file everything correctly, the IRS won’t have reasons to audit your return. If you want to avoid some common mistakes that trigger audits from the IRS, this blog post can help.
1. Failing to report all of your income
It’s common nowadays to have multiple income streams. Some people trade assets and cryptocurrencies. Others might earn money through rental properties or the gig economy. But regardless of where or how you earned your income, you must report it on your tax return.
If you earned more than $600 from an entity, you should expect to receive a 1099. Even if you didn’t earn an income through the gig economy, like driving for Uber or delivering with Postmates, companies like eBay, Amazon, Robinhood, and Coinbase will send you that form each year for your taxes. If you earned money through dividends or interest, you must also report that on your tax return.
2. Overestimating donations
The IRS encourages taxpayers to donate items such as clothing, food, and used vehicles to charities, and offers deductions in return. However, it is the taxpayer's responsibility to determine the value of the donated goods, which can be challenging.
To help taxpayers, the IRS recommends valuing donated items between 1% and 30% of their original purchase price. Unfortunately, many taxpayers are unaware of this or choose to ignore it.
Fortunately, there are other tips to help determine a "fair" price for donated goods. For instance, taxpayers can hire an appraiser to provide a letter stating the item's worth, especially if it is valued at $5,000 or more. Additionally, taxpayers can use the willing-buyer-willing-seller test as a benchmark, valuing items at a price where a willing seller under no duress could sell the property to a willing buyer who is also not under duress.
3. Excessive home office deductions
Since the COVID-19 pandemic, working from home has become more prevalent, but not everyone is eligible for a home office deduction. Typically, this deduction is only available for independent contractors. Even then, it's important to avoid stretching the definition of a home office, as doing so could prompt an audit.
Deducting an excessive or unwarranted amount, such as your entire monthly rent, could trigger a red flag. It's best to determine the appropriate amount of space and expenses associated with your work in a modest manner.
Furthermore, deductions that are disproportionately large compared to your income may catch the attention of the IRS. For instance, if you made $75,000 as a copywriter working from home, claiming $50,000 in home office deductions would raise eyebrows. Attempting to deduct personal expenses, like a new bedroom set, as office equipment is also not recommended.
To qualify for the deduction, you can claim an area where you keep your essential work supplies, such as a computer, printer, work phone, and bookshelves. This area should also be where you conduct the majority of your work and not be used for any other purpose, especially personal use.
Additionally, certain groups have specific home office deduction rules, such as Armed Forces reservists or fee-based state or local government officials.
Filing your taxes appropriately is crucial to claim your home office deductions. Independent contractors should file their taxes on a Schedule C (Form 1040) to accurately report their income and claim expenses.
4. Claiming 100% business use of your vehicle
If you use your car for work-related purposes, such as traveling to meetings or appointments as a freelancer, you may be eligible to claim a deduction for the cost and maintenance of your vehicle on your taxes. However, it is important to note that claiming 100% business use of your car may not be the wisest decision. This is because the IRS understands that it's highly unlikely that you only use your vehicle for work, and if you do claim this, it may raise red flags.
To help ensure that you're on the right track when it comes to claiming business expenses, it's a good idea to keep accurate and detailed records of your vehicle expenses. This includes receipts, mileage logs, and other relevant documentation showing the actual percentage of time you use your vehicle for work purposes. By doing this, you'll be better prepared in case the IRS ever does come knocking at your door.
5. Simple mistakes
It's important to avoid basic mathematical mistakes when filling out your tax return, as they can lead to audits. Make sure to double-check that your columns add up correctly and that any capital gains or losses are accurately calculated, as even a small error can raise red flags with the IRS.
Another common mistake is forgetting to sign your tax return. This oversight can trigger additional scrutiny from the IRS, who may question what else you may have missed. Be sure to sign your return to avoid unnecessary attention.
How can Taxfyle help?
Tax season stressing you out? We get it. That's why we're here to help. Having a Tax Professional prepare your tax returns can free up your time and avoid the headache of last-minute tax cramming. Trust us, it's worth it!
At Taxfyle, our team of qualified U.S.-based Tax Professionals are licensed and experienced CPAs or EAs who can handle any unique tax situation. Plus, by letting a Pro handle your taxes, you reduce the risk of potential audits.
So, why take the pressure off yourself and let our Pros do the hard work? They'll make sure your taxes are filed accurately and on time, leaving you to focus on other important things in your life. Before the deadline strikes, get your taxes filed by a Pro.
