Filling late to decrease chance of an Audit???????????

[mrichman333]

Good records are always the best protection. Just hard to convince some clients it's worth the effort. Until AFTER the audit.

I'm nagging some clients all the time about their records.

[Eric]

Everyone I know (as in people who aren't tax professionals) says I'm nuts for not doing a home office deduction.

I use my office exclusively for work, but I have book shelves built into two walls filled with tons of books. Kids books. Programming books. Text books. Just lots of freaking books. Also, there's a closet in the room where I store stuff that's not business related.

I have very few expenses, so the money I make freelancing just destroys my tax return. But I'm still too paranoid about using the home office deduction.

[Jack from Ohio]

Everyone I know (as in people who aren't tax professionals) says I'm nuts for not doing a home office deduction.

I use my office exclusively for work, but I have book shelves built into two walls filled with tons of books. Kids books. Programming books. Text books. Just lots of freaking books. Also, there's a closet in the room where I store stuff that's not business related.

I have very few expenses, so the money I make freelancing just destroys my tax return. But I'm still too paranoid about using the home office deduction.

Your Paranoia is unfounded.

[SCL]

1.5% or so of returns are audited.

I'm speculating without research...but

97+% of those returns involve over $1 million individual agi or business net income.

[Eric]

My friend was audited because he sold some of his artwork to McDonalds, forgot about it, and then failed to report the income.

I do a lot of projects for a lot of large companies, but I also report all of that income.

Would any of you folks recommend that someone in my position take the home office deduction? My paranoia may be unfounded, but is it the right thing to do? Maybe it's a bit of a grey area, Idunno.

[Jack from Ohio]

1.5% or so of returns are audited.

I'm speculating without research...but

97+% of those returns involve over $1 million individual agi or business net income.

Official word from the IRS is that in 2012, .9% of all returns were audited.

[Jack from Ohio]

My friend was audited because he sold some of his artwork to McDonalds, forgot about it, and then failed to report the income.

I do a lot of projects for a lot of large companies, but I also report all of that income.

Would any of you folks recommend that someone in my position take the home office deduction? My paranoia may be unfounded, but is it the right thing to do? Maybe it's a bit of a grey area, Idunno.

It is a deduction you are entitled to take, and will have a reasonable impact on your return. As long as you continue to report all your income, why not report all the legitimate deductions you are entitled to?

The idea that it increases your chances of audit is an urban myth spread by a bunch of old wives. Do it correctly, and don't look back.

[JohnH]

My friend was audited because he sold some of his artwork to McDonalds, forgot about it, and then failed to report the income.

I do a lot of projects for a lot of large companies, but I also report all of that income.

Would any of you folks recommend that someone in my position take the home office deduction? My paranoia may be unfounded, but is it the right thing to do? Maybe it's a bit of a grey area, Idunno.

Eric, you're not nuts for not taking the home office deduction. But you may be costing yourself some money. Your greatest risk is filing a schedule C in the first place, but you don't have any choice in that matter if you have self-employment income.

Using made-up examples, if a Schedule C adds 50 points to your DIF score, claiming the home office might add another 5 points. So if all the factors on your return added up to 302 points, and the cutoff happened to be 300, then technically the home office put you over the magic number. But the relative risk isn't that great. (Those are total fabrications - the scoring system might be in the thousands, for all I know. But I think the principle is valid.)

On the positive side, keep in mind that the home office deduction is more valuable on a dollar-for-dollar basis than an itemized personal deduction. This is because the home office deduction reduces your self-employment tax in addition to your income tax. And now that the IRS offers a simplified method, I suspect the relative risk has gone down for those who opt to use it.

[Jack from Ohio]

DIF scores are a comparison of your return to the established "averages or normal" for the same kind of return and entries. When your numbers differ from the "average" it changes your DIF score.

During the processing routine all tax returns are scored or rated for audit potential under IRS's top secret computer program called DIF, for Discriminant Function. The higher the DIF score, the greater the potential of bringing in additional taxes under the audit. The IRS strives to audit the higher-scored returns first BECAUSE of the expectation of getting more revenue for government coffers. DIF scores are developed from an analysis of a series (involving up to 50,000 randomly selected returns) of intensive audits, conducted every few years, called the Taxpayer Compliance Measurement Program (TCMP). In a TCMP audit, the IRS will analyze every item on the tax return, including proof of income. (DIF scores therefore reflect correlated averages found on a cross-section of tax returns.)

[SCL]

I suspect your friend got "audited" because mdonalds reported the sale/income on a 1099misc.

"forgot" to report income is only an excuse that works when there is no irs "paper trail".

to pursue my scenario, you friend really did not really get "audited".

he got computer verified...like anyone on a w2 or 1099 int/div/pension/and MISC.

about your oih question...that goes to a sch c?

assuming you are doing it properly, then no problem.

assuming you are doing it incorrectly, then very, very likely no problem.

unless the oih deduction is way over the line...

is your indirect expense % deduction around $500.

if so, deduct your 100% direct expenses on your sch c and...

forget about claiming/revealing the extra/minor oih expense/hoops you have to jump through.

[Eric]

I suspect your friend got "audited" because mdonalds reported the sale/income on a 1099misc.

"forgot" to report income is only an excuse that works when there is no irs "paper trail".

to pursue my scenario, you friend really did not really get "audited".

he got computer verified...like anyone on a w2 or 1099 int/div/pension/and MISC.

I don't know if there was a 1099 or not, but I doubt he would have failed to include the income if he received one. At any rate, an auditor came to visit, asked a lot of questions, didn't find anything else, and didn't pursue it further after they talked about golf for 45 minutes.

...On the positive side, keep in mind that the home office deduction is more valuable on a dollar-for-dollar basis than an itemized personal deduction. This is because the home office deduction reduces your self-employment tax in addition to your income tax. And now that the IRS offers a simplified method, I suspect the relative risk has gone down for those who opt to use it.

I do understand the impact on my return. I don't take the deduction because I didn't think I was allowed to, not because I thought it might trigger an audit. If I am allowed to take the deduction, I wouldn't worry about an audit because that's the only detail on my return that I'm questioning.

The room contains:

• books unrelated to the business on the shelves
• a dog bed
• closet for storage of non-business stuff, although not counted in the square footage of the office
• a gun cabinet

I spend at least 20 hours a week in there, and 100% of that time is spent on freelance web development. This is on top of a 9-5 job doing the same type of work, but I commute for that job.

[kcjenkins]

Eric, it's not the contents of the room that's the issue, it's the activities in the room that make it an 'office'. The books and dog bed do NOT disqualify it. The IRS rule is that you must use your home substantially and regularly to conduct business, to qualify for a home office deduction. 20 hours a week in there, and 100% of that time spent on freelance web development, would absolutely qualify.

[Eric]

I should have asked about this before I filed my return two weeks ago. Haha.

[jklcpa]

lol , well keep it in mind for next year. There have been some posters here that would argue that the contents of the closet would cause you to fail the exclusive use test, but the tax court also has a de minimus factor that has been applied in cases too. Iirc, we had a topic on this very issue within the last year where personal photos were mentioned to be a no-no. I'm sure others here can attest that with the things people get away with on their returns and are never audited, that you wouldn't have any worries. I picked up a new client that had oih on the return in prior years, and the things the former preparer included in those expenses would make your head spin; items deducted that are clearly spelled out in the pub as NOT being allowed, and this was from a mid-sized CPA firm in my area.

I think you should take the deduction, Eric.

[Jack from Ohio]

I should have asked about this before I filed my return two weeks ago. Haha.

If then amount is substantial, amend. Amending does NOT increase your chance of audit. Fly straight, fly right, do it correctly and amend.

[Gail in Virginia]

My biggest hesitation factor for OIH in the past has been that if you plan to sell your home within a few years, you will have to recapture depreciation instead of having the entire gain excluded. If I remember correctly, now that you can take a "standard" OIH deduction based solely on square footage, depreciation recapture is no longer a factor. I would not hesitate to take it, especially it the income earned in that space is significant.

[Jack from Ohio]

My biggest hesitation factor for OIH in the past has been that if you plan to sell your home within a few years, you will have to recapture depreciation instead of having the entire gain excluded. If I remember correctly, now that you can take a "standard" OIH deduction based solely on square footage, depreciation recapture is no longer a factor. I would not hesitate to take it, especially it the income earned in that space is significant.

If your business is profitable, the OIH will save a between 25%-40% tax on every OIH dollar deduction.

When selling the home, the very small amount of depreciation recapture will be treated as capital gains currently taxed at a maximum of 15%. A good trade, no matter how you look at it.

All the fears about OIH are unfounded if done accurately and properly.

At the firm, in 30 years of doing tax returns for small businesses, which is our main emphasis, only one audit questioned the OIH and it was an afterthought, not the original cause of the audit.

For the record, we prepared 2,200+ returns at the firm for small businesses. 70% of those have OIH. The numbers have been that high for over 20 years.

[mcb39]

I believe you should take the deduction. I have a closet in the old part of my OIH, but have never counted the SF of the closet. I also have a lot of SF in the basement that never gets counted and should. I found this year that for a certain few clients; switching to the safe harbor method was the best thing to do. You can take your pick, but in my opinion, you safely qualify for OIH. One important fact to remember is that the deduction is not really for a Home Office, but rather for "Business Use of the Home". I have clients who use parts of their home to store supplies and tools for their Sch C businesses. This also qualifies. If push comes to shove, I have clothes in the closet, but I also have lots of extra toner cartridges, paper, envelopes and computer parts and backup drives in there. If you are entitled to a deduction, take it.

[joanmcq]

I don't take the square feet that represents my closet in my home office either, even though I store a ton of stuff on top of the closet, but keep off season clothes in it.

Don't include the bookshelves in the sq. ft you allocate to office.

[bertrans]

To paraphrase Churchill on the subject of Russia, the IRS audit procedure is a mystery , wrapped in an enigma. As the procedure has become and continues to become more and more a function of computer algorithms, transparency is rendered a disatnt and nostalgic memory. So far as can be determined, the only 'Person' Who knows what the cutoff for a DIF audit is, is God, i.e., a complex of computer routines and sub-routines, and He is not talking, except to mainframe computers. There is then an entire series of computer algorithms ('filters'), each of which is focussed on ONE particular audit issue: yes, the raw returns, during submission processing, are 'run' through...one of the filters; if it is selected for that filter, it bypasses the other filters and is examined only for that one issue; if it is not, it proceeds to the next filter, and so on into cyber night. The Service, you must see, is striving to streamline. Now, let it be understood, that, at the level of a Field audit, the examining officer(i.e., the Agent) has the authority to open up any issue which he deems to have sufficient audit potential...but he doesn't have to, and his superiors tend to express reservations on such enthusiasm - they have to answer to THEIR superiors, etc. All of which means, alas, that as to the likelihood of an audit, flip a coin. NOTE: exception - compliance audits:

[bertrans]

To paraphrase Churchill on the subject of Russia, the IRS audit procedure is a mystery , wrapped in an enigma. As the procedure has become and continues to become more and more a function of computer algorithms, transparency is rendered a disatnt and nostalgic memory. So far as can be determined, the only 'Person' Who knows what the cutoff for a DIF audit is, is God, i.e., a complex of computer routines and sub-routines, and He is not talking, except to mainframe computers. There is then an entire series of computer algorithms ('filters'), each of which is focussed on ONE particular audit issue: yes, the raw returns, during submission processing, are 'run' through...one of the filters; if it is selected for that filter, it bypasses the other filters and is examined only for that one issue; if it is not, it proceeds to the next filter, and so on into cyber night. The Service, you must see, is striving to streamline. Now, let it be understood, that, at the level of a Field audit, the examining officer(i.e., the Agent) has the authority to open up any issue which he deems to have sufficient audit potential...but he doesn't have to, and his superiors tend to express reservations on such enthusiasm - they have to answer to THEIR superiors, etc. All of which means, alas, that as to the likelihood of an audit, flip a coin. NOTE: exception - compliance audits:

I ran out of space to complete my thought. Compliance Audits: Ravenous beasts from Hades, equal-opportunity destroyers, no mercy, no quarter.