Work at Home? Here's How to Avoid an Audit

February 5, 2014

The Consumerist has a helpful list of tax tips to follow to avoid being audited by the IRS. Some of these sage pieces of advice are relevant to people who work at home, or who run home-based businesses. If you work at home, take heed of these three things when reporting your income.

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(Photo Credit: Tax Credits/Flickr)

1. Home Office

Do You Know What You're Worth?

Claiming home office space for an entrepreneurial business is a classic red flag for IRS auditors. If you claim this deduction, you are best off if you have one room in the house dedicated as the home office. If you can shut the door and have no other use for the space, then you can claim the square footage of that room. It’s also important to note that you can’t write off your home office if you work for someone else, unless you do so for the convenience of your employer.

If your home office space is a section of a room, you must measure carefully and be able to say that area is used for nothing else. Better to underestimate the amount of space used. Home business owners get into trouble when they have multiple uses for the office space deducted on their taxes. As The Consumerist points out, home office space is a favorite of IRS auditors.

2. Work Use of Your Vehicle

Another sticky point is work use of your personal vehicle. While your best bet is to have a separate vehicle for work purposes, that is not always financially feasible.

If you choose to use the standard mileage deduction for a car you own, keep careful records. If you choose to deduct operating expenses for business use of your personal vehicle, you must be able to convince an IRS auditor that you are not overestimating how much you use your car for work. Operating expenses include maintenance, repairs, and fuel.

The good news is that tolls and parking expenses for business purposes are considered separate expenses and deductible whether you use the mileage or operating expenses method of deduction.

3. Report All Income

Don’t take chances; report any and all income you earn from your home-based business, no matter how small. The amount you will pay when an audit uncovers the income far outpaces anything you saved by neglecting to report.

Tell Us What You Think

Do you have a home-based business? Which method do you use to deduct for use of your car? Leave a comment or join the discussion on Twitter.