4 Common Myths About Tax Audits

If you already have a business location, you should be using that for all your business transactions. There are certain instances where you can get away with having a business address and a home office. But you must be prepared to provide documentation about how and why both locations are legitimately used for business. To avoid an audit, include a detailed statement with your tax return with your explanation and documentation about the legitimacy of both locations.

1. Reporting rent expenses on Schedule C, line 20b

To the IRS computer, this looks like you have an office elsewhere and an office in-home. If you have legitimate rental expenses, like storage, consider reporting those costs on Part V of the Schedule C, as Other expenses.

1. Reporting utility deductions on Schedule C, line 25

All home office utility expenses should be reported on the Form 8829. If you are showing utilities for the other business location, see #1.

Myth: Deducting meals, entertainment and travel expenses means you’ll get audited

Those who deduct legitimate business expenses rarely have a problem. But don’t get greedy. Don’t write off every meal because you used the word “business” while you were out with your friends. That doesn’t make it a business deduction.

Tip: Look over your business’s net profit (or loss). Are your meals, entertainment and travel expenses a large percentage of your sales? Say, over 10 percent? If you still show a profit, you’re probably fine. But if those expenses are over 25 percent of your gross income, make sure they are completely legitimate, and backed up by receipts and appointment data.

Myth: Showing losses year after year will result in an audit

Well, this is only partially a myth. If you’re truly running a business, you should show a profit at some point. If you’re not showing a profit, why are you investing your time and money in this activity? The IRS frowns on people who deduct their hobby expenses to offset their wages and other income, simply to reduce their taxes.

1. In general, whenever you have legitimate expenses and receipts to back them up, claim them. Don’t let fear of an audit prevent you from deducting expenses you’re entitled to use. Being as honest and accurate as possible means you’re unlikely to make significant mistakes, and thus less likely to be audited.