George S. May Business Blog

Tax Filing Tips – Ways to help from getting audited by the IRS

Believe it or not, you don’t have to be stashing millions of dollars away in a Swiss bank account to trigger an audit from the IRS. Even the smallest of errors on your tax return could draw a red flag.

I just read a statistic saying that the number of audits last year were at an all time high since 1998. Since it is more than likely, in my opinion, the number won’t fall here are some tips how you can stay away from getting that knock on your door.

Show All of Your Income

One of the worst mistakes that you can make is fail to report all your income. Remember, your income is not solely measured by your salary and bonuses. Income includes proceeds from sales of stocks and bonds, dividend earnings, brokerage and bank accounts and any other interest-earnings investments. Unemployment income needs to be included as well.

Pay Taxes on Forgiven Debt

If a lender has agreed to reduce your debt, you still have to pay taxes on the original amount. Make sure to include the forgiven debt in your tax return.

Note: Debts are not taxable income in cases where the taxpayer proves that his debts surpass his assets or when debts get discharged through bankruptcy – be it Chapter 7 or 11.

Be Careful When Filing a Small Business Loss

A common trick, which the IRS is especially privy to, is for small business owners to report a loss on, in reality, what is more like a hobby, while instead they are living off of other sources of income.

To avoid raising suspicions, it is simple, just show proper documentation. That includes bank account statements (it’s always best if the business accounts are separate from the personal ones), receipts and invoices. For example, if you take a client out to dinner and foot the bill, don’t write it off on your tax return unless you have the receipt to prove it.

The bottom line: be particularly careful to dot your i’s and cross your t’s, especially if your small business shut down last year.

Home-Office Deductions

Home-office deductions are often abused and therefore big red flags for the IRS. In order to qualify for this deduction, the office must be your principal place of business and used exclusively for business. In effect, if you use the office for business during the day and a family room at night, you wouldn’t be eligible for a full deduction on the cost of that room.

Report Real Estate Gains and Losses Correctly

Whether you lost your home to foreclosure or managed to eke out a gain on a sale, you’ll need to include the transaction on your tax returns.

Because a primary residence is a personal asset, homeowners can’t claim a deductible on their tax return if they sold their home at a loss. In many instances, the real estate investor who sold an apartment building at a loss will make off with more from the IRS. He or she can claim a deductible, but will need to show the price they bought and sold it for and the amount of money they pumped into the building, whether it be for maintenance or repairs.

Meanwhile, those fortunate few homeowners who made money on the sale of their home will need to report that gain.

Here is some good news: for those who underwent a foreclosure last year, the Mortgage Forgiveness Debt Relief Act of 2007 does not require homeowners who lost their home to pay taxes on the forgiven mortgage debt. Once again, be careful, as this applies only to individuals who lost their primary residence due to foreclosures that occur through 2012. If that residence is a rental, however, you still have to pay taxes.

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