Every year around this time the financial experts and tax planners come out of the woodwork and inundate us with last minute tax advice. They always emphasize the importance of taking advantage of any eligible deductions, and we tend to agree – with a few significant exceptions. If you’re planning to write off some expenses for such things as a home office; a personal car that you also use for work; and travel, meals, lodging, and entertainment deductions because those activities and expenditures were all business related then you think twice.
There are lots of deductions you can take – especially if you run your own business or work from home – but just because the IRS offers them to you it does not mean you should take them. Why? The reason is really simple. Research shows that the IRS and other tax agencies look for so-called red flags or telltale signs that someone may be cheating on their taxes by filing false returns or inflating their eligible expenses in order to get away with paying less.
We also know from studies and patterns that some of the most conspicuous red flags and warning signs are 1) people who deduct because they have a home office, 2) people who deduct for travel related business expenses, and 3) people who claim a deduction because they use their personal car for work.
That’s because if you use your car for work – but also to stop off at the grocery store, to pick up the kids at school, or to go visit your relatives at Thanksgiving – you are mixing business with pleasure and personal life. That’s against the IRS rules. Maybe you use your den as a home office but watch the football game in there with your buddies when you aren’t working. Rack up a bunch of expenses for “business trips” to South Beach and you are just begging for an audit.
Of course you may be doing everything totally legal and completely above board. That’s not the point. The reason you don’t want to raise your statistical chances of getting audited is that it is huge hassle and it might uncover some honest mistake you made one year and wind up costing you a bundle. So before you take any business deductions, consider the risk and the potential consequences. If the money saved is not compelling enough, forget it – just pay a little extra and enjoy the added peace of mind as you get a good’s night sleep not worrying about the IRS coming to visit you.
