Do You Want to AVOID Getting Audited by the IRS?

Showing Enough Income

The IRS pays attention to the story you tell through the numbers you report on your tax return.

If you claim yourself and file as Single but your Adjusted Gross Income is around $5,000 or worse, it's negative, the IRS will wonder HOW you are paying more than half your living expenses (since you claimed yourself). They may suspect you are actually someone else's dependent (aka someone else pays your rent or you live with someone who pays the rent).

The same thought process goes for if you claim a dependent...did you show ENOUGH income on the Adjusted Gross Income line (on page 1 of your tax return).

There's not a magic number I could suggest, but definitely don't over do the expenses on your Schedule C at the risk of getting audited. The net profit or loss gets added to any other types of income you have (W2, 1099-DIV, etc...), and those amounts get totaled and end up being your Adjusted Gross Income.

Choose ANY Number Besides 5 or 0

On your Schedule C, when listing income and expenses, AVOID numbers that end in 5 (five) or 0 (zero). This mainly applies to expenses. But if you charge your customers by even numbers only, then that might be the exception, and you should report the accurate number.

Numbers ending in 5 or 0 are practically a DEAD GIVEAWAY that you don't do proper bookkeeping and are GUESSING at your expense totals. They know it's practically impossible for each category of expenses to add up to numbers ending in 5 or 0.

The IRS looks for patterns...so make the expense amounts different from each other.

Without Receipts...Be Cautious and Conservative

The IRS holds you responsible for keeping accurate records along with PROOF to back it up. If they audit you, they will ask for the receipts to back up your numbers. If you don't have them, they won't let you count them.

If you haven't kept up with receipts, you may want to be conservative with the amounts you enter on your Schedule C and think through what story they tell.

Avoid large amounts in categories that don't match your business.

Also, put amounts in categories that match your business and most businesses (office expenses, repairs and maintenance, supplies, utilities, advertising, etc.), so you have several categories with amounts. They don't have to be large amounts, just something. This makes your tax return look balanced.

Google these categories for ideas of what types of expenses should be included for your industry.

Choosing Single vs Head of Household

This one may seem self-explanatory or common knowledge but in this case, it wasn't.

I recently spoke to a client who for years was having his local tax preparers (who must not have had proper training or experience filing) file his tax return as Single even though he had a dependent on his tax returns.

If you have a dependent (child OR adult), you are not married, and you pay for more than half the living expenses for yourself and the dependent, you would choose Head of Household. Usually, rent is the largest living expense people have and whoever is paying rent is likely the Head of Household.

This matters because you get a much HIGHER Standard Deduction on your tax return when you file as Head of Household.

Review Your Tax Return BEFORE It is Submitted if You Have a Tax Preparer

The IRS will hold YOU fully responsible for the information filed on your tax return.

Most local tax preparers are just trying to file as many returns as possible as quickly as possible to make a fast commission. They are not invested in making sure you file the right information OR in helping you save money.

If they make a mistake, you can catch it before it's submitted if you take the time to review it. If you don't, you could get audited for how they file your taxes.

Honestly, I've heard tons of horror stories that involve local tax preparers, so please beware of who you trust with your information.

Think of getting your taxes prepared by a tax preparer as you HANDING OVER YOUR WALLET and saying "Take what you need to take" because essentially what they file is what you will pay (whether it's right or wrong).

My advice is if you make a lot of money (over $200,000 PROFIT aka after expenses), you should look for a TAX ADVISOR (gives advice at the beginning of the year to reduce your tax bill next year) who is also a FIDUCIARY (by law have to give you advice that's best for YOU, not them).

Hope this was helpful!

Until next time...

To your success,

Loma