Tuesday Tax Tips 2/19/13

The IRS is continuing to ramp up audits the government needs to collect funds, so how does a person get selected for audit.  Some are randomly audits but that is really a small percentage, most of the time the IRS has a specific reason. 

1. Claim Head of House hold when you are really Married:   If you are married on Dec 31, 2012 then you can normally only file a MFJ or MFS tax return.  There is one exception but it's very limited.

2. Claiming Earned Income Tax Credit when not eligible:   You only qualify for EIC if your child has lived with you for more than six months.  EIC is not transferable and is only allowed by the parent with whom the child has lived with the longest.

3. Failing to Include a Form 1099 W2 or Other Income:  Per IRS documents they state that over 60% of self employed individual do not report all of their income. The IRS matches 1099 forms, W2's, schedule K, and other income documents in their records to the amounts on your return.

4. Inflating Home Office Deductions:  If you use a part of your home for business, you're entitled to deduct the related costs as a home office. However, to qualify for the home office deduction, you must use that part of your home being claimed "exclusively and regularly for your trade or business." That means your home office must be your actual office, not just a spot in your home where you sometimes do work.

5. Too Many Losses on a Schedule C:  Filing a Schedule C is statistically more likely to face an audit. One reason is that there is a temptation to overstate losses. Tax Law assumes you're in business to make money. Filing a loss year after year usually raise question whether you are serious about your business or is it a hobby.

6. Claiming Disproportionately High Charitable Deductions:  Charitable deductions are one of the most common deductions claimed on a personal income tax return.   90% of taxpayers who itemize claim charitable deductions.   Most people charity amounts to about 3% of their income so claiming 20% will raise red flags.  If you happen to be a person that donates a lot be sure to have your documents of your donations.

7. Using Too Many Round Numbers:  How often is your store purchase an even $20, not often.  The IRS looks at tax returns the say way.  You should report your actual items of income and losses, not approximations. If the IRS sees too many numbers that look like guesses, they may ask you for supporting documentation.

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