If you use the Home Office Deduction or live a lavish lifestyle while looking poor on paper, the IRS Audit computer may view these as red flags. This is not bad. However, you must keep good records.
Johnny retired from the State. He did 25 years of public service and now works for himself. He started a business three years ago and runs it from his El Dorado Hills basement. He assembles his own tax returns. He says, “My business is too small. I am under the radar. I will claim all the deductions I can.”
He routinely claims a 20% home office deduction. Although he uses his basement for a wood crafting shop, he feels “home office” is the best category. He wrote off his mortgage, utilities and cleaning costs. The IRS was not impressed. It selected his return from three years ago.
Johnny has two issues. 1) The IRS is auditing his return from three years ago. 2) If he cannot prove the home office deductions are legitimate, the IRS may audit his other returns.
Johnny calls Dave Fechter and schedules an appointment. He visits Dave’s Folsom office. Dave helps Johnny relax and approach this in a calm, patient and professional manner. Together, they calculate how much of Johnny’s home if being used exclusively for the business. Although the number does not reach 20%, they submit a response. They show how 15% was for business use. They politely present this to the IRS Auditor. He accepts the response. Johnny pays a fair tax. IRS Audit done.
Had Johnny fought the IRS, which was his first intention, things may have gone worse. Rather, Johnny called Dave Fechter and they responded in a calm, patient and professional manner. Johnny and Dave worked together.
When the IRS tags you, remain calm. Find a professional who can help you get through the IRS Audit in a calm, patient and professional manner. Getting back to the first question about the Home Office Deduction being a red flag. The answer is YES. You can still claim it if your records support it.