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*Disclaimer: This article is accurate as of the publish date February 27, 2013
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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 in the hopes of saving money. Before you decide to do this though, you may want to understand the ramifications of you actions. Using all of your deductions could lead to more hassle in the long run.
If you're planning to write off activities and expenditures that are business-related, think twice. Here's a look at why that may turn into a disadvantage.
Why It May Be Best to Avoid Tax Deductions
Just because the IRS offers a ton of deductions for your business 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", which are tell-tale signs that someone may be cheating on their taxes. This may not be true in your case, but the IRS may assume you're filing false returns or inflating you eligible expenses in order to get away with paying less. Essentially, you're putting a big sign on your forehead that says "Pick me! I need to be audited!"
Which Deductions to Avoid
Red flags can show up for a number of reasons. Most commonly, people are assessed because they 1) deduct because they have a home office, 2) deduct for travel related business expenses, or 3) 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, you are mixing business with 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.
But I'm Not Doing Anything Wrong…
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. Auditing is a nasty process, and very few people are prepared for it. It is your job to minimize your red flags so you can avoid all of this.
Last Minute Words of Wisdom
Before you take any business deductions, consider the risk and the potential consequences. Figure out which deductions are really important and which ones you can just live without. If the money saved is not compelling enough, forget it. Just pay a little extra money that year. Then you can enjoy the added peace of mind you get not worrying about the IRS coming to visit you.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.