Advice needed on avoiding self-employment audit flags please

In years past this did not matter much to me but this year it may matter quite a bit. It is about taxes and write-offs.

Up until last year I was a fairly normal wage earner, having a "job" and a "side hustle." Well, a few side hustles but only one mattered. I would keep track of my miles driven and choose a business type on whatever form you fill out for the IRS. Expenses were very minor except for the driving. That was big and allowed me to deduct nearly half my earnings from said side hustle.

This year I am a 1099er for the foreseeable future, and to be honest I barely care if I ever get picked up to W-2 status. But I am afraid of raising red flags all over the place in spring 2015 when I file. I will not have one and only one SIC Code to pick from. And I mix my daily use for my needs. For example, tomorrow by day I am a courthouse landman, by evening I am a casino party dealer. Mi driving is home-courthouse-hotel-home. It is all "business miles" but more than one business. I expect to mix-and-match this way 25-40 days or more next year.

Barring a major change it will break down this way:

Landman, day job, 80 miles a day and maybe $500-1,000 of legit business expenses mostly computer
Dealer, main side-hustle, 3-5,000 miles and maybe $100 of legit expenses, mostly laundry and uniform
Notary, mini-side hustle but can heat up. $500-1,000 in insurance and office supplies plus mileage each trip
Secret-shopping, very minor hustle with mileage each trip and minor office supplies. Mostly do this if laid off from Landman or just bored and want to "earn a dinner out."

So my concern is what if anything should I do to avoid red flags with the IRS? There is a little relationship with landman/notary but other than that to an agent I may look like some kind of nut. Any suggestions on how to prep now to avoid the audit-flags?

I have heard from my accountant friend that if you file a home-office deduction, it vastly increases the odds of getting audited.

Simplest question in the world.

Be sure that your return is prepared and signed by a tax professional, i.e. a CPA, and not an entity such as H & R Block, etc. Been self-employed for 20 years, done it this way every single year, with no problems whatsoever. I believe that IRS generally views the CPA's involvement as a gold standard of sorts, inasmuch as that professional's own license is on the line if the returns he/she prepares and signs are found wanting.

I've heard the home office deduction sets off a red flag. For this reason, I don't claim mine, even though I would rightly qualify for it.

I don't have much advice, but I'm interested in what you can deduct for the landman gig since I am starting one. I didn't think of computer; my firm suggests a non-Apple product. Thankfully, I have a PC so I won't buy a new one. So I don't think I can deduct the cost. I may buy the new Microsoft Office Suite and deduct that, save a few bucks on my taxes.

Yes, home office deductions can raise a red flag... but more importantly if you own your home it could make your sale more complicated down the road when you do decide to sell.

The problem with home office deductions is that they are usually exaggerated. When people can legally deduct the space for their desk they deduct the whole room plus half the kitchen and two closets and half the garage.

I've been audited several times. If you are on the up-and-up you won't have a problem. Be square, be fair, and take your deductions.

Quote: AlanMendelson

I've been audited several times. If you are on the up-and-up you won't have a problem. Be square, be fair, and take your deductions.

If you're on the up-and-up, why do you get audited so much?

Quote: teddys

I don't have much advice, but I'm interested in what you can deduct for the landman gig since I am starting one. I didn't think of computer; my firm suggests a non-Apple product. Thankfully, I have a PC so I won't buy a new one. So I don't think I can deduct the cost. I may buy the new Microsoft Office Suite and deduct that, save a few bucks on my taxes.

It depends. Some landmen are direct-hire and can deduct little as they are just a normal employee. But if you are contract you can deduct your computer an associated software. I just had to buy MS Office because OpenOffice was causing formatfting errors. If you have to rent your desk you can deduct that if you actually pay them for it, mine seems to be netted out. Mileage/auto use is a legit expense. Possibly health insurance depending on if you set up as an LLC. At least part of your cell phone as most landmen use scanning and other apps in addition to the calls. If you are not reimbursed for copies keep track of that as it is a huge cost. Home Office has been discusses but I will not even bother. Finally any other software or supplies you have to buy, the biggest being plotting software though IIRC you are in Ohio which is a Section/Town/Range state and not metes-and-bounds as we are over here so you may use that little if at all.

I don't see anything you should be worried about. For those of you with home offices, you can opt to deduct $5 per square foot this year up to 300 sq ft in lieu of actual expenses. In the past, I've done side work that involved high miles that reduced that income by 50%, and I never had an issue.

Quote: sodawater

I have heard from my accountant friend that if you file a home-office deduction, it vastly increases the odds of getting audited.

Quote: Summit Portfolio Management

Claiming a home office must meet the requirement and qualifications of the IRS tax code. Many taxpayers, especially with the onset of remote employees and virtual work attendance, the IRS places added scrutiny on those who claim deductions for home office use.

Source: 10 Big Tax Mistakes That Can Lead to an Audit

The IRS does have 'flags' but rarely will they be looking at you all that much earlier than they would have been looking at you already.

If you are entitled to it, take it. If they disallow it, dispute it. Its the income side they always worry about the most.

Quote: Wizard

Source: 10 Big Tax Mistakes That Can Lead to an Audit

Lucky I got none of them.

How did this thread pop up after 4 years?

Quote: AZDuffman

How did this thread pop up after 4 years?

I happened upon the article in my Email and remembered I made the point of the home office deduction setting off a red flag to be audited. Thought I'd add some evidence behind an old post. I still don't claim that deduction out of fear of an audit.

Quote: Wizard

I've heard the home office deduction sets off a red flag. For this reason, I don't claim mine, even though I would rightly qualify for it.

I also work 100% from home and asked my tax guy if it increased the chances of getting audited.

He said “So what if it does?”

That’s why I pay someone to do my taxes. They deal with the audit and it’s really not a huge deal as long as everything is above the board.

Quote: gamerfreak

That’s why I pay someone to do my taxes. They deal with the audit and it’s really not a huge deal as long as everything is above the board.

My accountant said if I ever get audited it would be very expensive to defend myself, not that I have anything to hide. I'm sure I would win a fight over the a home office as a legitimate deduction, but the expense of the fight is much more than I gain from taking the deduction.

We donated some valuable stuff last year and I always use turbotax. When it came to these deductions they threw the advice out there to not claim more than $500 for it ... and it was worth considerably more.

I worked it out to a bit less than $500. A word to the wise is sufficient they say.

Gamerfreak, I don't know about that advice you got. You just want to be dealing with these people as little as possible. I'll relate two experiences,

*back in my younger days I went a couple of years without filing taxes, then filed them late as hell. So the IRS determined the fine and interest and billed me. For some reason I don't remember there was a bit of back and forth; in the final bit they felt done with me, so to speak, and "here it is, pay it". I discovered a simple, obvious mistake and wrote back asking for that to be corrected and could never get anyone there to respond. They just seemed to know I was better off just paying it and shutting the f.... up. So I did.

*After I got married, which was in the Fall, I did taxes "married filing separately" for that year, thinking that was the thing to do and then we could file jointly the next year. Accountant my wife had been using then tells me that was a mistake costing us about $400; so he did all the paperwork and did an amended return as us "married filing jointly " instead. Pretty soon I get back in the mail the complete package he had sent in, rejected without any explanation. Clearly no one wanted to deal with it at the IRS, even though they created special forms to fill out for the purpose. The accountant was plenty competent, and he said he couldn't believe it. It was a clear case of "f... you, pal! sue me!" I mean really, at least there could have been an explanation, on the other hand to actually put 'screw you' in writing? Maybe not. At this point I would have gladly paid $400 to have nothing more to do with them, and just dropped it.

Quote: Wizard

I happened upon the article in my Email and remembered I made the point of the home office deduction setting off a red flag to be audited. Thought I'd add some evidence behind an old post. I still don't claim that deduction out of fear of an audit.

Cool, thanks. Someone with a detail memory like mine good to see (though Mission has the record there!)

FWIW I never took it. For all I have been told if you are below six figures in income the IRS will consider you not worth the hassle and leave you alone.

Quote: odiousgambit

*After I got married, which was in the Fall, I did taxes "married filing separately" for that year, thinking that was the thing to do and then we could file jointly the next year. Accountant my wife had been using then tells me that was a mistake costing us about $400; so he did all the paperwork and did an amended return as us "married filing jointly " instead. Pretty soon I get back in the mail the complete package he had sent in, rejected without any explanation. Clearly no one wanted to deal with it at the IRS, even though they created special forms to fill out for the purpose. The accountant was plenty competent, and he said he couldn't believe it. It was a clear case of "f... you, pal! sue me!" I mean really, at least there could have been an explanation, on the other hand to actually put 'screw you' in writing? Maybe not. At this point I would have gladly paid $400 to have nothing more to do with them, and just dropped it.

One thing they told us in tax training was that MFS is the absolute worse way to file. The IRS seems to not want it as you lose several deductions and exemptions, I forget exactly which, but your example is spot on. My mother's sister just got divorced which was strung out over a several year estrangement. I had to explain this every year, don't do it

Quote: Wizard

I happened upon the article in my Email and remembered I made the point of the home office deduction setting off a red flag to be audited. Thought I'd add some evidence behind an old post. I still don't claim that deduction out of fear of an audit.

So you are knowingly filing a false return? You legitimately run a business but are not listing the business expenses? I am sort of teasing......

50 years ago or so I have a vivid memory of my grandmother and grandfather preparing for an IRS audit. They were told they were the "one in a thousand" chosen for a random audit. Their combined income was less than 10k a year I'd bet. The stress that they were under going through the shoebox of papers, was palpable. From that moment on I learned that the 'cost' of an audit was worth avoiding at all costs. I am lucky in that all of my income is 'visible', and comes with either a W-2, 1099, or K-1. (Some would say unlucky....). And my deductions are all clear and easy to document.

I too went through a transition from a W-2 salaried employee to 1099 independent contractor when I entered consulting. My experience is:

I was able to claim very large travel expenses as business expenses against my 1099 income without an audit. However, my business expenses (which were all legitimate, by the way) did not exceed 30% of my income on the 1099. I think the IRS understands that "personal businesses" have expenses and that travel expenses are easy to justify and document. But on the bottom-lines of the forms I was also paying a very respectable amount of tax (including the damn self-employment tax), so I was probably not judged to be a high +EV opportunity. Only so much blood can be squeezed from a stone.