How Freelancers Can Reduce the Risk of Being Audited by the IRS

If you’re a freelancer, just picturing a white envelope in the mail from the IRS that says you’re being audited is enough to make your heart rate jump.

Paying your own taxes is one of the most stressful parts of being a freelancer. Chances are you worry every time you file your taxes that you’ve done something wrong, especially if you don’t have bookkeeping software doing the work for you. Even small slip-ups on your taxes can trigger an audit, and audits aren’t only intimidating, they’re also expensive and time-consuming.

Thankfully, there are a number of steps you can take as a freelancer to reduce your chances of being audited by the IRS.

Don’t Fib Your Deductions

The surest way to land your files on someone’s desk in the IRS is by fibbing your deductions. Lying about your business expenses to get a few extra dollars back on your return is never worth it. However, ignorance isn’t an excuse either. There’s a lot of confusion amongst freelancers regarding what can and can’t be deducted, so make sure you get your facts straight before you file.

Home Office Deduction

Lots of freelancers assume they can use the home office deduction for anywhere they get work done, whether it’s at a table in the kitchen or in the guest bedroom. However, you can only use the home office deduction for spaces that are truly your home office. In other words, they’re used for business, and nothing else. The IRS can come to your home and inspect your home office.

You also can’t deduct every last paper clip you buy just because you sometimes use them for work. If you’re deducting 100% of your laptop, you need to be using that laptop for work 100% of the time. The same goes for your desk, office chair, and office supplies. If you use them for personal use half of the time, you can only deduct half the expense.

Food, Entertainment, and Travel Deductions

These are some of the most heavily scrutinized deductions after the home office deduction. The IRS can be especially suspicious of expensive meals, non-work travel, and weird medical expenses. This goes back to honesty being the best policy. Only deduct an expense if it was solely for work, and you have the materials to prove it. That includes receipts and records regarding the purpose of the expense and how it relates to your business.

Mileage Deductions

Mileage is another common deduction that you have to be careful with. If you’re claiming a mileage deduction, that trip should be taken exclusively for business. Avoid mixing personal errands into work trips.

Make sure to record your mileage and how the trip was related to business. You should also know that you have to pick one method for claiming mileage deductions between taking the standard mileage rate or claiming itemized expenses. You can’t mix both.

Keep Deductions Reasonable

Regardless of what deductions you’re claiming, make sure they’re reasonable amounts relative to your income. If you make $30,000 per year and you’re claiming $35,000 in deductions, you’re probably going to raise some red flags.

Keep Your Business and Personal Finances Separate

The best way to ensure that your tax returns are accurate is by keeping meticulous financial records for your business. You can do this by separating your business and personal finances. It doesn’t matter what stage you’re at in your business, you should have a business bank account that’s solely for business expenses and earnings. It can also be smart to open a business credit card, just make sure you’re not using it for personal expenses.

Come tax time, these accounts will make your life much easier. Not only will filing your taxes be a breeze, but if you are audited by the IRS, having your finances separate will help your case. If your business and personal expenses are all mixed up, you’ll have to spend a lot of time and money pulling all of your personal bank records for the IRS to comb through, and they could start questioning everything you reported.

Report All Your Income

Just because you didn’t get a 1099 from a client doesn’t mean you don’t have to report that income. All businesses that paid you more than $600 are required to report that to the IRS, so the IRS already knows about your various income streams. Failing to report one is an easy way to trigger an audit. Go through your income records with a fine-tooth comb to make sure that the income you report matches what the IRS has on file.

Double Check Your Returns…Especially if Your Income Changed

Even simple errors can cause the system to flag your return, so be sure to double-check your work. Avoid rounding numbers up as well. It looks strange if your expenses all add up to $50 or $100 instead of $43 and $98. It’s especially important to double-check your returns if your income has changed drastically, as significant changes in income can be part of what triggers an audit.

Use an Accounting App and Hire a Professional

The best way to ensure you don’t get audited is to use a good accounting app that tracks your income and expenses throughout the year for you. This will help you avoid making silly math errors or forgetting a client you only did one project for.

It’s also a good idea to hire a professional to help you with your taxes. This can mean hiring an accountant, paying for tax filing software, or using an accounting program that comes with tax preparation services. Whichever you choose, the investment will pay off when tax season rolls around.

The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.