How Freelancers Can Avoid an IRS Audit

There's nothing more frightening to a freelancer than being informed that you must report to an IRS representative, or even worse, have the IRS visit your home office. Although you may be able to deduct many items from the income tax as a freelancer, be forewarned that freelancers are audited more than regular salaried workers are. That's because freelancers file for more deductions that people who don't work for themselves.

How can you avoid an audit from the IRS? Here are some helpful suggestions....

Red Flags for an IRS Audit

*Too many deductions for a small income---Probably the biggest red flag for an IRS audit is running a home business with limited income. In other words, you claim more than a reasonable amount of expenditures to operate it. If you don't want the IRS to see "red flags" then be careful of those business deductions that seem unrelated to other items on your tax return.

*Questionable Itemized deductions---Watch out for those itemized deductions that stand out as being unreasonable such as medical items, which are more targeted by the IRS.

Determine Home Office Expenses

First, determine the square footage of your house compared to the size of your home office, giving you a percentage of what proportion of your home is set apart for work. Take that percentage and deduct expenses such as electrifcity, phone calls, etc. Just be aware that the IRS will check up on all your numbers, so be accurate.

Keep Business Separate from Personal Life

If you use your computer for anything else but your business, then you're in danger of an audit. Because many freelancers write off the expense of their computer, the IRS particularly examines home office equipment. Therefore, if you plan to write off expenses for your home office, make sure it's used solely for business, and not for entertainment.

On the other hand, your home office needn't be a separate room. However, it does have to be set apart, both regularly and exclusively, for your work, meaning your children's toys or TV sets should not even be tucked in a corner. Also, be sure to keep all personal mail, as well as all non-work related items off your desk.

Keep Business Expenses Reasonable

True, you have expenses when you travel for interviews, but you don't have to go first-class. To reduce your odds for an IRS audit, eat at Wendy's rather than at a five-star motel. Expenses such as travel, rental cars, and entertainment are inspected with a fine toothcomb. In addition, be sure to be specific about your expenses noting particulars such as dates, amounts, places, and the people with whom you dined.

Be Honest---Don't Hide Anything

Don't be deceived into thinking you can conceal anything from the IRS, knowing the reality that it's easy to be found out, especially since it's hard to hide from the internet. Be forewarned they check everything from property records and bank records to automobile registrations. Report every bit of income, as failure to do so could result in a lawsuit. If it's suspected you're underreporting your income, you make yourself suspectable, therefore losing credibility.

As a final note, don't let the possibility of an IRS audit prevent you from using your tax deductions, as that's one of the benefits of freelancing. Just be sure to be safe as well as accurate and reasonable regarding all your tax deductions as a freelance writer.