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Friday Financial Five – January 25th, 2013

Friday, January 25, 2013

 

Audits normally total just over one percent of total tax returns filed, with big income and very low income earners more likely to get flagged. You may have heard that the government needs revenue, so audits are expected to increase. Let’s look at five red flags to keep in mind when preparing a tax return.

Unrealistic Deductions

For the typical tax return, the IRS is interested in seeing deductions in line with other taxpayers of similar incomes. Taking huge deductions is going to raise immediate concerns, so make sure everything itemized on Schedule A qualifies. Technology has allowed a number of workers to move from traditional large office space to home offices. The home office deduction is one of the trickier expenses to quantify, so keep meticulous records.

Mistakes in the numbers

When expecting a refund, there’s a rush to get the return completed as soon as possible. This might mean a miscalculation or submitting a return before receiving all necessary documents. Double check figures to ensure everything is accounted for. Also, there may be a bias against handwritten returns. Apparently, the IRS thinks computer technology is less likely to make a calculating error.

Schedule C

Filing a Schedule C raises the probability of an audit by quite a bit, especially if the filer is showing years of losses. Those using Schedule C might be tempted to be slightly more liberal in reporting expenses, so be sure spending claims are in line with similar businesses. For those grossing over $100,000, consider the benefits of incorporating.

Using a personal car for business

This is one of the most difficult deductions to track. Keeping a record of mileage and expenses for an entire year must only excite the most anal of taxpayers. When in doubt, most taking this deduction try to figure total mileage for the year and then calculate the percentage of time it was used for business. 

Losses on rental property

For those that own rental property, a Schedule E is necessary. Unless an individual qualifies as a real estate professional, losses on rental property can be limited. If you’re engaging in a lot of real estate related business, be sure to investigate forming an LLC or qualifying as a real estate professional.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at dforbes@forbesplanning.com.
 

 

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