Whether you duly discharge your tax liability by paying 100 percent tax on your earnings and unfailingly file your annual returns, you can still come under the magnifying lens of the IRS. And the last thing you would want is to trigger an IRS audit. You may come out clean, but the toll it takes on your time and money, not to mention the accompanying stress is really not worth it. So, how does one steer clear of an IRS audit?

We suggest five ways you can avoid an IRS audit:

#1 Curb large charitable donations

Keep the philanthropist in you under check. Though there is nothing wrong in opening your heart to make a donation to a registered charity, don’t open it too wide. Take care not to be give away a disproportionately large amount in charity. For example, if you earn $80,000 in a tax year and donate $25,000 in charity, it may rouse suspicion of the IRS. You also need to be clear as to whom you can donate. As per the IRS, you can only make charitable contributions to qualified organizations and never to individuals.

#2 Avoid disproportionately large home office deductions

If your home office is your principal place of business, you are free to make deductions, regardless of the amount. Just going in for home office deductions will never raise suspicions for the IRS. However, if these deductions are disproportionately large, as compared to your other returns and the returns of other tax filers of your profile type, you may come on the IRS radar.

#3 Avoid deductions on exclusive business vehicles

IRS hackles will not be raised if you legitimately claim business use of home deductions that may include supplies, utilities, etc. or claim business use of vehicle deductions, which may include fuel, maintenance, repairs, auto club membership, not to mention, depreciation deductions. However, you are certain to sow the seed of suspicion in the minds of the IRS personnel, if you claim that the vehicle being used is exclusively for business purposes, especially if you don’t have any of your own personal vehicle.

#4 Avoid high expenses on travel and entertainment

The IRS is forever on the lookout for high expenses incurred on travel and entertainment. This requires the filers to follow the strict substantiation rules to make peace with the IRS. The mistake occurs when you fail to do so out of ignorance or deliberately try to evade your tax liability.

#5 Never deduct hobby losses

A myth that fails of fade away is you can deduct your hobby losses. The term ‘hobby losses’ itself is kind of a misnomer, because as far as IRS is concerned, a hobby is a hobby and not a legitimate business. According to them, the only way a hobby-like activity can be used for deduction claims is when it becomes a legitimate business. If you are under the impression that this activity has generated profit in three of the last five years, know that this is not a legislative standard and the IRS can refute this claim. In such a scenario, always consult a tax attorney before making any such deductions.

Conclusion

The proverb ‘prevention is better than cure’ holds true where IRS is concerned. The lesson learned is to avoid any deductions that may make the IRS suspicious enough to order an audit.

Published by Kaushal Shah