The word “audit” is enough to strike fear in the heart of any taxpayer. Although the IRS announced it will conduct fewer tax audits in 2016, an audit is always a possibility – especially if you mismanage your tax return.
If you have questions about tax law, don’t hesitate to contact a Boulder tax lawyer about your case. An experienced tax lawyer can help you avoid missteps that could bring the IRS knocking.
1. You Have a Home Office
If you work from home, you’re in good company. According to a Gallup poll, 37 percent of Americans now telecommute. You can claim your home office as a deduction, but there are specific rules for doing so.
Your office must be separated or divided from your home’s living space, and it must be used exclusively for your business. Your deduction must also comply with the calculation for determining the square footage of your office versus the total square footage of your home.
2. Filing Late
If you can’t file your return on time, don’t simply wait for the filing deadline to pass. Filing an application for an extension gives you an additional six months to file and does not increase the likelihood of an audit. Getting an extension also helps you avoid late fees and penalties.
3. Failing to Report Foreign Bank Accounts
In years past, taxpayers could maintain overseas bank accounts without worrying much about the IRS finding out. For example, Switzerland became famous as a haven for wealthy folks looking to store their savings away from American soil – and avoid paying taxes on it.
This all changed with the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010. The Act requires overseas banks to be transparent about Americans with bank accounts over $50,000.
Because the penalty for non-compliance is being cut off from U.S. markets, more than 77,000 banks around the world have agreed to comply with the Act’s reporting requirements.
In addition, the U.S. is one of only two countries in the world that requires its citizens to pay taxes on foreign-earned income. Americans with a foreign bank account that exceeds $10,000 at any time during the year must file a Report of Foreign Bank and Financial Accounts, more commonly called the FBAR. This reporting requirement applies to all foreign bank accounts with an aggregate value of over $10,000.
4. Running a Cash Business
Many small business owners operate cash-only enterprises. The downside is that the IRS keeps a close eye on cash-only businesses, as they are more likely to underreport income.
Cash-only business owners can lower their risk of an audit by clearly and thoroughly documenting their transactions. Your business may not have a paper trail, but you can still create one by keeping meticulous records.
5. Excessive Deductions for Business-related Travel, Meals, and Entertainment
Auditors often look closely at business-related meals, travel, and entertainment. There are strict rules for deducting these types of expenses, and many business owners fail to provide thorough documentation.
Other business owners misinterpret the rules. For example, if you take a business trip to Arizona and take the family along to see the Grand Canyon, make sure the primary purpose of the trip is business, not pleasure. In general, you should devote more travel days to business than to your personal vacation.
Do You Have Questions about Tax Law?
The tax code is complicated. Protect yourself and your business by working with a knowledgeable Boulder tax lawyer. Contact the Law Office of David Kelly today to speak to an attorney about your case.