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#1 REPORT ALL TAXABLE INCOME

  • The IRS receives the information from Forms W-2, 1099, 1098, etc. and uses computers to match this information with the amounts filed on tax returns.
  • If information from W-2s, 1099s and other documents is not reported on the proper forms and according to the correct method, the IRS will easily identify discrepancies and will issue a notice to the taxpayer.
  • If you receive a W-2, 1099 or other form that is inaccurate, you should contact the issuer to request that they submit a corrected form to the IRS.

#2 FOLLOW PROTOCOL REGARDING CHARITABLE CONTRIBUTIONS

  • You certainly should claim all legitimate charitable contributions that you make.
  • However, understand that the IRS knows the typical contribution levels for your income level. If your contributions exceed this threshold, the IRS may contact you to take a closer look.
  • Be sure to file Form 8283 for non-cash donations that exceed $500.
  • Be certain to obtain appraisals for non-cash donations that exceed $5,000.

#3 UNDERSTAND THE HOME OFFICE DEDUCTION

  • Very specific requirements must be met in order to take this business deduction.
  • The home office area must be used exclusively on a regular basis as your principal place of business and you must not have another office available.
  • Common areas that are used for both personal and business purposes do not qualify.
  • If you do qualify for a home office deduction, then a percentage of rent, real estate taxes, utilities, insurance, mortgage interest and other expenses allocated to the home office may be deductible.
  • If you claim the home office deduction you should properly document these important details so that you can prove this to the IRS if your return is examined.

#4 AVOID LOSSES FROM HOBBY ACTIVITIES

  • Profits and losses from business activities are typically reported on Schedule C of Form 1040.
  • Losses from Schedule C activities receive scrutiny from the IRS. This is particularly true if the losses offset wages and income from other sources.
  • The IRS looks more closely at losses if your Schedule C activity appears to be a hobby. A few examples of potential hobby activities could be arts & crafts, car racing or horse breeding.
  • In order to claim a business loss, you must, among other requirements, be able to demonstrate that you are conducting a legitimate business with a reasonable expectation of generating a profit. Be certain to operate the activity in a business-like manner with supporting documentation for all expenses.
  • Be sure to track business and personal transactions separately. Use a separate bank account for the business.

#5 BE CAUTIOUS REGARDING CURRENCY TRANSACTIONS

  • The IRS pays close attention to cash-intensive businesses such as bars, car washes, salons and similar businesses.
  • IRS agents are trained to interview business owners to detect indicators of unreported business income.
  • The IRS receives reports of cash transactions exceeding $10,000. Multiple daily transactions may be aggregated.
  • Banks and other institutions also file reports regarding suspicious currency transaction activities.

Please remember these are general tips and advice. If lyou have questions about your specific situation... please contact a financial advisor.

Courtesy of:

Christopher J. Harper, CPA, MBA
Senior Manager
Hungerford, Aldrin, Nichols & Carter, P.C.
2910 Lucerne Drive SE
Grand Rapids, MI 49546
charper@hanc.com
Phone: (616) 726-6054

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