How to Avoid Getting Audited

Alden Wicker

4. Using Your Car for Business

Sure, a lot of people use their cars for some part of their business. But if you’re also using it to shuttle kids to lacrosse practice, it just doesn’t qualify. This is old hat to the IRS, so don’t think you can outsmart them.

Perfectly OK: The car is used solely for delivering wedding cakes to your clients.

Not OK: Sometimes you drop off deposits at the bank on your way to getting your nails done.

The Proof You Need: Keep a record of your mileage, and calendar entries specifying your starting and ending addresses, and business purpose for every time you use the car for business.

5. Your Home Office

A lot of people think they can stretch the definition of a home office, which is why claiming it could trigger an audit.

Perfectly OK: A study where you keep your computer, phone, bookshelves and other supplies for work, and where you do the majority of your work and that is not used for any other purpose, especially personal use.

Not OK: A desk with a computer in the corner of your living room or guest bedroom where you work for a few hours a week.

The Proof You Need: If you want to take this deduction, make sure to read IRS Publication 587. It is very detailed, and even includes a semi-fun (well, sort of) flow chart to make sure you’re on the up-and-up. And on a positive note, next year taking the deduction won’t be nearly as complicated.

6. Errors

It seems obvious, but we can’t leave it off the list because it’s one of the top reasons for audits.

Perfectly OK: Small math errors. The IRS will fix these.

Not OK: Claiming the wrong deductions and credits, filing under the wrong status and stating the wrong income.

The Proof You Need: Double- and triple-check your work before filing and, again, keep meticulous records and proof for deductions and credits.

7. Round Numbers

Did you really spend $100 on this and $500 on that? If every year you have tidy little numbers, it will cue the IRS that you’re making some things up. Or at least keeping terrible records.

Perfectly OK: Rounding to the nearest dollar.

Not OK: Doing things from memory and rounding to the nearest $25.

The Proof You Need: Have documentation for your deductions and credits, and use the actual numbers on your forms so they match your receipts and other records.

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8. A Business That Loses Money

It’s not ideal that your business loses money. (That kind of misses the point, right?) If the IRS sees someone who has a full-time business, and in more than three years out of the last five, it will make them look closer.

Perfectly OK: Things didn’t go well with your business this year or last year, and you took a loss.

Not OK: You have an expensive, full-time hobby like owning a vineyard or fixing up antique bicycles and you’re not even trying to make a profit.

The Proof You Need: You should have all the proper documentation as if it were a business, and prove that it made a profit for three out of five years.

  • Kiraya G.

    The part about claiming your vehicle is simply not true. It’s perfectly legal to claim your business mileage for a car used for business as well as personal use, if you keep good mileage records. Source: My accountant, being self-employed for years as a traveling sales rep. (Seriously, how many sales reps have their own private “business vehicle??”)

    Also, new IRS laws make it possible to claim home office deductions in non-enclosed spaces. However, the caveat is that the space, however small and open, HAS to be used solely for business… no kids playing on the computer, no keeping your personal paperwork there, no playing video games after hours etc. (Never mind that most people do some of that stuff at their office jobs, you can’t do it for a home office). Pictures are good documentation if you get audited, I’ve been told by my accountant. You also really need to know the square footage of the area. They changed these laws because it’s very expensive for most people to have a separate room, and many types of building structures (studio apts, lofts etc) just don’t allow for that luxury. The key now is the function of the space, and the exclusivity AND it being your exclusive place of doing business, not whether it has a wall around it.