• Finance

Tax traps most likely to incite an audit

It’s that time of year again. Freelancers and the self-employed must start gathering together their financial information in order to report to the Internal Revenue Service (IRS). If you haven’t started this process already, it’s definitely a good time to start, as the earlier the better.

The earlier you start preparing your taxes, the easier it can be to ensure that you will not be audited by the IRS. Unfortunately, but likely not surprisingly, freelancers and the self-employed are most likely to trigger an audit by the IRS. The complexity of the tax code and our desire to do our own taxes causes many freelancers to struggle with tax compliance.

How do you avoid getting hit with an IRS audit? There are a number of things to keep in mind while preparing your taxes in order to keep an audit at bay.

All the deductions

Anytime you can deduct something from your taxes is a good financial time, but deductions of all kinds are some of the biggest triggers for an IRS audit. Freelancers have access to a lot of deductions because of the nature of the work, but just because you can find a deduction for everything from apps to your shiny new home office doesn’t mean you should.

Instead, you must be deliberate in how you deduct that new home office. As long as it is used only as a home office, you’re golden. Office supplies, of course, can be deducted, but these must be exclusively used for work.

Another gray area is vehicular expenses and deductions. Mileage is a great deduction for many freelancers, as it can get racked up quickly. However, if you use your business trips as opportunities to conduct personal business as well, make sure you track the differences. A savvy IRS auditor could notice the pattern and head your way. Be wary, too, of deducting repairs to your car for anything that was incurred during work.

All that Income

Freelancing can be great for generating income without having to work a 9-to-5, but reporting it to the IRS can get complicated. Of course, there’s the task of making sure you have 1099s from all your clients who actually paid you.

Being diligent about collecting 1099s from your clients and checking them for discrepancies is key to reporting your income correctly. This will keep the IRS at bay for any possible wonky math. At the same time, you may be tempted to round figures, especially for things like deductions. The only time it’s okay to round on your taxes is to whole dollar amounts.

We all want to be successful, and freelancers can make it big. When you do, however, reporting a large income as a freelancer or as a self-employed worker is a sure-fire way of calling the IRS to your door. If your business starts to grow that profitable, it’s wiser to incorporate yourself if you can than to continue as a freelancer.

Incorporating yourself is a great way to protect both you and your assets, legally and otherwise.

All the Questions?

In the end, you may still feel out of depth at filing your own taxes. If this is the case, you could always support another freelancer by hiring a freelance accountant to prepare your taxes. Sitting down with a tax pro is a good way to learn more about preparing taxes.

It’s also a good way, as writer Kelly Clay noted for Fast Company, of taking the anxiety out of a highly-stressful process. As she points out, being a freelancer is stressful enough.

Hattie is a writer and researcher living in Boise, Idaho. She has a varied background, including education and sports journalism. She is a former electronic content manager and analyst for a government agency. She recently completed her MBA and enjoys local ciders. Tweet at Hattie: @hejames1008 and find her on LinkedIn.