First of all, don’t panic. Your chances of being audited by the IRS are about one in a hundred. Just over 1%. Of course the IRS would love to audit everyone but naturally this takes money. Money they don’t have. The reason they’d love to audit everyone is so they’d catch the ones who are lying on their tax return. They’d recover some money they’re being cheated out of, and the tax system in the US would be more fair.
It’s True, Some Deductions are Red Flags to the IRS
But alas, the IRS has neither the time nor the money nor enough trained staff to scrutinize every tax return that comes through their doors. So what do they do? They use statistics, experience, and general common sense to sort out the tax returns that seem like they might contain falsehoods.
Certain factors on your tax return may make it seem to the IRS that there’s potential for scam. Taking a look at past years’ returns, the IRS has learned that there are certain specific areas on the tax return that are more “fudged” more often than others. One of these is deductions. Taxpayers’ and their accountants’ primary objective is to legally pay as little income tax as possible. Deductions are their best friends (well maybe tax credits are a little better because they’re worth more, but you know what’s meant here). As we learned, tax deductions reduce the taxable income.
So naturally it’s tempting for taxpayer to try and squeeze all they can from their deductions. One major area where they often go too far is the home office deduction.
Home Office Deduction
The IRS has found it rather easy to win in cases where it disputes the home office deduction on individuals’ tax returns. As for taxpayers, this deduction produces dollar signs in their heads, since so much of what they thought was simply the cost of daily living, can now be deducted:
- phone bill
- home repairs
- home insurance
Wow, you can deduct everything!
But beware, there are conditions that must not only be met but also substantiated and proven should you get audited by the IRS. You have to prove that your home office is used only for work and never for personal use. Think about that. If you look up a cookie recipe on your computer, located in your home office, technically you’ve used your home office for personal use and there goes your home office deduction.
Your little home office must be used not only exclusively for business but also used regularly. You can’t simply have a spare bedroom that’s never used except for business, but you only go in once a year. To take the deduction, you have to use the office regularly. So, if it’s a guest bedroom and also your home office, that deduction is pretty much out of your grasp. If there is so much as a bed or a kid’s toy in your home office, kiss the deduction goodbye if you get audited. Read more about the home office deduction on the IRS website.