Eliminating Red Flags on Your Tax Return

Avoid the pitfalls of insufficient preparation, documentation

diversitymandisgruntled1Getting audited is probably not on your list of goals for this year. However, if you’re sloppy with your tax returns, you’re practically asking for a review from the IRS.  To reduce the red flags on your paperwork, here’s what certified public accounts (CPAs) and enrolled agents (EAs) say you need to watch out for:

UNDOCUMENTED EXPENSES: “It’s more important than ever to make sure you have receipts to document your operating costs, especially if you have business losses,” says Benita Myers, an enrolled agent in Elk Grove, California. “Large losses can trigger an inquiry on your tax return.”

With the current economy, it’s likely that businesses will have significant losses to report. However, if they don’t have the receipts, they can’t deduct certain expenses.

UNPROVEN EXPENSES: Assume you’ve kept all your receipts. If your expenses involve dining and entertainment, be prepared to provide additional information, such as who attended the gatherings and what the business purposes were, says Frederick E. Davis Jr., a tax partner with the New York office of Mitchell & Titus, a member of Ernst & Young Global.

Don’t just throw in a restaurant receipt for a business lunch, he says. Instead, write the names of the other people attending the meeting, and include a description of what was discussed.

INCONSISTENT INCOME: Even if you don’t have a business loss, tax figures that are inconsistent with previous year’s numbers could raise a red flag, Davis says.  “If you make $300,000 in one year, and then make only $25,000 the next, it could raise eyebrows.”

If you did actually experience a large change in income, of course, report it. Just be sure you have written documentation to verify it.

NO MILEAGE RECORDS: When you drive a car for your business, your mileage expenses are legitimate deductions, says Henry J. Reavis, an enrolled agent in Atlanta.  “The problem is people don’t always do a good job keeping track of their business miles.”

Get into the habit of writing down your odometer reading — both before and after a trip — recording where you traveled and the business purpose, he says. Also, make sure you have your miles recorded for the entire year.

SIMPLE ERRORS: Sometimes people make mistakes such as writing the incorrect social security or employer identification number (EIN) on their returns, Davis says. Be sure to proofread everything before sending it to the IRS.

LACK OF PROFESSIONAL HELP: If you need help with any of the points above, or if you have specific tax questions, see a tax professional. And if you’re audited by the IRS, you’ll absolutely want a tax pro, such as an enrolled agent or a CPA, to help you.

“Enrolled agents (EAs) are allowed to represent people in any state before the IRS,” says Myers.  “CPAs are also allowed to represent people in their specific state.”

If you’ve got good records, and good professional help, then you have a good chance of making it through

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