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You probably aren't too concerned about being selected for an audit. Well, if you're a freelancer, avoiding an audit should always be on your mind as you file your taxes. Why? Because, no matter how straight you play it, freelancers get audited much more than salaried employees do. No - United States IRS doesn't have it in for independents, but numerous deductions that we file set us apart from other taxpayers.
So what can you do to keep IRS from noticing your return? Below find hints and suggestions to keep IRS away! These tips are particularly relevant to those in US, though other tax systems may be similar -- check with your accountant for details. And please note that information provided here should by no means be used as a guide to filing your taxes! These are merely suggested tips and hints. Be sure to seek professional advice in taxation, as in all business matters.
Six Steps to an Audit-Free Tax Return
1. Be Careful With Deductions
The IRS's favorite target is home office deduction. In order to qualify for a home office deduction, your office needs to be your "principal place of business" and used "regularly and exclusively" for business. In plain language, this means that your home office needs to be place where you spend most of your time and make majority of your income.
You'll also need to keep your personal life out of your home office. For example: a trick that I heard IRS sometimes uses is to ask taxpayer being audited "Do you use your computer for 50% personal and 50% business or 5% personal and 95% business?" If you answer 95% business, you have flunked test -- answer needs to be 100% business. This example demonstrates strict enforcement of guidelines for home office deduction. We'll talk about this more in Home Office Deductions for Freelancers.
You also need to keep other deductions that you want to take to a reasonable level. Keep a receipt for all deductible expenses, especially food, entertainment, travel, and automobile costs. These are often deductibles that are most scrutinized by IRS. You should also keep expenses in a log, along following information: