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Tax problems solved.
No matter where in the world you are.
by: David Parent 2013-07-10
When reviewing income tax returns we always pay special attention to the Business use of your home section (Line 30) of the Schedule C. The reason we do so is that a lot of our IRS audit representation has stemmed from this troublesome area, the home office expense audit. The IRS knows that business owners often see an opportunity to overstate expenses via their Home Office Deduction. Thus, the IRS auditors, in selecting returns for audit, also pay special attention to the deduction.
If you are keep good records and are doing things correctly, then your chances of being audited are small. The small probability of being audited provides little comfort if you are audited. As for tipping off an IRS auditor, if an auditors sees a deduction that seems inconsistent with the business as a whole, then a red flag goes up.
A good example is a taxpayer with a small income but a large home office deduction. The deduction may well be legitimate. A taxpayer with a large mortgage interest payment will inevitably have a large home office deduction. Nonetheless, the audit red flag is up and the Auditor will come calling.
Think like a Boy Scout and be prepared!
There is another side of the problem that we have not addressed. That is, the businessman who works out of his home but does not take the deduction. By not taking the deduction he misses out on an opportunity to substantially lower his income and payroll taxes.
What can he do? The first task is to set aside a room or portion of the house for exclusive use as an office. The second is to review the steps we have outlined in this blog and the third thing is to consult a tax audit professional who can assist him in setting up the records needed to compute the deduction.