All businesses, regardless of the type, are in the same standing when it comes to tax obligations. The IRS requires that as an entrepreneur, you should report all of your income, file your tax return and pay other amounts that are owed to the government. This order extends to business transactions that are mostly done online. Fortunately, several tax benefits, and even loopholes, that apply to regular offline ventures can also be utilized in online businesses. Knowing what these are, is specifically important for you to avoid dealing with IRS problems in the future.

One primary tax break that online entrepreneurs can use is having a home office. Often, online businesses are done at home, hence, depending on specific requirements, business owners can actually qualify for these significant tax deductions. They just have to remember that for a house to be considered as home office, it must be regularly and solely used for business purposes.  A dining room utilized as an office during the day will not qualify under this type of tax deduction.

The primary and main use of any given space or room should be for the business. This includes daily operations and client meetings. However, you may divide the use of that space for personal and business reasons according to percentages. For instance, a room can be used as a home office 75% of the time, and a family area, 25% of the time. However, when possible it is always better that you keep it rather simple and make an effort to use the space solely for business or else you may have an IRS problem on your hands. 

It is also imperative to prove to the IRS that your home office is your principal place for business. Entrepreneurs are not prone to violating this condition as online businesses are largely done at home. The importance of this requirement lies on the fact that the IRS has to ensure that business-related endeavors are done in the confines of the home office, and not somewhere else. 

These two main requirements, when met, will certainly allow you to deduct many costs associated with your office and home. Among other expenses, these costs include rent or mortgage payments, insurance costs, utility bills and property taxes. You can not, however, deduct all of your rent or mortgage payment. The way it works is usually through a percentage computation. If your office makes up for 25% of your home, and your mortgage payment is $1,000 monthly, then you would be able to deduct 25% of that $1,000 which is $250. So every month you would be able to deduct $250 which calculates to $3,000 per year. This is essentially how you should deduct expenses related to your home office. Keeping all of your documents for your online business will definitely go a long way towards avoiding an IRS problem.

There are also restrictions imposed to online business tax deductions. For example, you cannot claim for a number of deductions which, when totaled, will record a net loss for that year. Technically, you can’t claim for a net loss equal to the $10,000 difference of an annual revenue of $50,000 and total exemptions of $60,000. What you can do in this case, however, is claim for a net gain of zero.

People avail of as many tax deductions as they can. This is largely because of their desire to rid themselves of the IRS or save as much money on taxes. Unfortunately, there are some tax deductions that are usually abused or that are too easy to abuse that the Audit section of the IRS notices these if anyone claims for them. Although these deductions are given to help taxpayers save some amount, others claim for very huge amounts that the IRS audit section will be prompted to make an investigation. Everyone is aware that IRS problems come after an audit.

One of the commonly misunderstood deductions is the home office. People think that they can claim a deduction equivalent to the entire value of the house if they do business there. They don’t realize that certain rules are outlined to orient taxpayers of the extent of their rights. Understand that IRS auditors are experienced in seeing inconsistencies and errors on tax returns. In fact, they have computers that calculate the accuracy of tax returns and even the probability on certain criteria which will aid them in the decision to audit one tax return over another. If you have simply deducted the entire value of your house because you have a home office, then you are up for some IRS issues.

Business owners often make mistakes on deductions concerning business advertisements on their respective vehicles. They believe that they can automatically deduct all their auto expenses from their taxes. Unfortunately, this isn’t the case. Normally, they can only avail of deductions related to the cost of the paint or the other advertising paraphernalia used on the vehicle. Based on the car’s business use, business owners can also claim for a certain percentage on the vehicle’s auto expenses. That is computed by dividing the business mileage you tracked (it’s a good idea to have an actual mileage log so that you can show auditors your excellent record-keeping skills in case you do get audited) by the total mileage. Hypothetically, if you drove your vehicle 10,000 miles in the course of a year, and had 2,000 of those miles counted towards business, then you would be able to deduct 20% of your auto expenses. If you are going to do this, then you should definitely keep very accurate mileage records, or else you may have serious IRS problems in the case of an audit.

Deductions regarding body parts and pets also commonly appear on people’s tax returns. Surprisingly, people do attempt to claim for deductions of body parts donated to science. Sadly though, if these donations are for non-profit groups and not 100% of your ownership rights and interests are donated, these are not valid claims for deductions. The IRS doesn’t consider donating a body part alone as giving up 100% of your ownership rights or interest since it is only a ‘part’ of your body. Hence, anyone who claim for deductions on body parts and pets are sure candidates of an IRS audit.

People continuously search for tips and ways for them to earn more money and at a faster rate. Because of the focus on this task, people forget that a higher income will also mean bigger tax liability. It is important to be keen on how you can save from your taxes, and this is especially essential when you retire.

Perhaps the most relevant example concerning this matter is your Social Security benefits. Remember that you’ve been paying your taxes into social security during your employment years. In case you’ve not been conscientious in your tax obligation, you might have IRS issues when you will already be receiving your social security benefits. There’s a higher probability that taxes will be imposed on this benefit. Generally, 85% of your social security income reaching to at least $34,000 per annum is taxable. This is certainly not good news, most especially to retirees who believed that they are done dealing with the IRS.

A simple tip is to put your money in tax shelters that can protect them from future taxes. For instance, converting your traditional IRA to a Roth IRA is a better choice. Doing so will allow the person to take money out of the account tax free. There are certain qualifications and requirements that have to be met but if you fulfill those, then why not make the choice and save yourself some money? There are also setbacks in converting your money. This time, you have to pay taxes for the converted amount. The amount that you have to pay could even be enormous, depending on your specific situation. These drawbacks however, do not keep many people from taking this choice.

Reducing your taxable income is a wise move. Instead of pulling money out of your IRA or 401k, you might like to consider living from selling off stocks that are in a taxable account that have also appreciated the least amount. Your capital gains will be lesser and this should spell to a lower taxable income. When you are able to subside by living on principal, then you have better odds of qualifying for the 0% tax bracket, just be careful, otherwise, you might face some potential IRS problems.

Another strategy is to simply spend your money relatively soon after you earn it. You might want to spend the earnings in your money market account or CDs in the same year that you have earned that interest. You will be obligated to pay taxes on that money whether or not you spend it, so don’t forget that you have the option of spending it. For example, if you have a CD worth $100,000 and it earns 5%, why not simply use that extra $5,000 this year instead of using it towards an IRA distribution. If you put that in an IRA distribution, it’ll just be made part of your overall total tax liability.

There are many simple money saving methods that retirees can implement at different times in their lives. Most of them don’t take much effort to accomplish and will have a minor impact to a person’s overall quality of life. However, the tax savings and extra money that is not being given to the IRS will definitely have positive effects on quality of life during the retirement years.

Any taxpayer will be glad to know what will catch the attention of the IRS enough for them to subject you to an audit. For some time now, majority of the tax returns are processed by IRS computers. The general idea is that the computer systems are programmed to simply look for anything that is considered ‘out of the ordinary’, and when each tax return is compared to the statistical average, or what is considered normal when the group is examined as a whole, it treats that difference as a flag. This flag raises the chances that such particular tax record will be audited. After the computer flags the tax record, it may be manually rechecked by an employee of the IRS, depending on the severity of the discrepancy that the IRS computer found. In some cases, the IRS computer will simply print out a notification that will delivered directly to the taxpayer.

The good news is if you get audit flags, you will not be immediately audited by the IRS. It only implies that your chances of getting one are significantly increased. Remember though that there are flags that you can effortlessly avoid. One of these is submitting sloppy and incomplete forms. Avoiding potential IRS problems would necessitate you to do your math computations correctly and to provide information completely. Otherwise, the computers can’t figure out the entries in the tax return and an IRS agent will need to review this. However, filing tax returns electronically will somehow solve this simple issue as the programs have math and field correctors that can identify erroneous computations and lacking entries.

Another scenario that will put up red flags is the non-declaration of all of your earnings. Basically, anyone who gives you a W-2 or 1099 also sends a copy to the IRS. Thus, the IRS knows how much you have really earned for the year and if you miss to report any of those, they will surely put you through an audit. To protect yourself from potential IRS problems, remember to make miscellaneous income, dividends and interests part of your annual income.

Claiming that you are earning below the minimum wage will also raise suspicions. Conversely, if you claim that you are making a great deal more than the industry norm, expect to be flagged and potentially audited. In fact, a minimum of 5% of all taxpayers are audited each year. In the same manner, those who have an annual income of more than $100,000 are 5 times more likely to undergo an audit.

If your tax record shows extreme fluctuations in your income level, that will again be considered as an audit flag. The IRS takes notice of this because they believe that most people don’t have such large differences in income levels. Usually they feel that you’ve underreported your income at one point or another.

Believe it or not, having too many zeros in your tax return will merit an audit flag. For instance, most expenses aren’t exactly $1,000 or $500. Having this kind of figures would make the IRS think that you have been rounding up too many transaction records and you are definitely up for something. At the very least, this scenario will prompt the system to have your records rechecked by an actual IRS employee.

The items discussed in this article are just some of the many known IRS audit flags and there are still a lot that people should be aware of for them to avoid an audit, and ultimately, an IRS problem.

If you’re guilty of not filing your taxes for a few years already, you are probably experiencing some issues with the IRS right now. You may have been getting notices imploring you to settle your taxes. Non-filing of taxes may lead to penalties, fines and even jail time, among others. Therefore, before matters get worse, it’s best that you set things right. You may ask: what will become of me when I have apparently disobeyed the law? The truth is, you’re basically putting yourself in danger with the IRS.

Filing the un-filed tax returns is the first step to setting your records with the IRS straight. You must do this even if you have doubts regarding your capacity to pay for all tax dues, including applicable penalties and fees. You must also immediately file your tax returns even if you are entitled to a refund. Otherwise, this benefit will be lost if you don’t attend to this matter right away. 

Depending on your specific situation, consequences for not filing your taxes will vary. If you’re a non-filer, cleaning up your tax records will cause the IRS to stop enforcing their collection procedures on you. In fact, many people who haven’t filed tax returns don’t really owe the IRS anything. They simply didn’t file because they didn’t have the time or didn’t have the needed background. As a result, the simple excuse is now a big legal battle.  

It’s a good idea to employ the services of a tax professional when you decide to file for taxes that should have been filed before. He/She can certainly help you out as you go through the procedures of filing and as you face current and subsequent IRS problems. In addition, he/she will be able to give you sound advice on IRS guidelines because of his/her solid experience in the field. 

What requirements should be brought to your meeting with the tax professional? All that is available. Bring as much information as you can and let your tax professional identify what you do not need. Your W-2 forms, any 1099’s, receipts and other supporting documents for expenses, social security numbers for anyone you are claiming as dependent and a copy of the last tax return that you filed with the IRS are just few of these requirements. All of this and anything else you can think of must be available to your tax accountant. The more information they have, the better will be your chances of successfully reconciling your tax records with the IRS.

Filing your past tax returns as  early as possible will largely affect your rights to a refund and your benefits from the Social Security. A refund can be availed of only if you have filed for the corresponding taxes within three years. Beyond this point, your right will be forfeited. Basically, this means that you are givng away your money. If you’ve failed to file a tax return and are self employed, then you will not receive credits that will be carried over to your Social Security retirement or disability benefits. The IRS will have no record of your taxes so they can’t report your earnings to the Social Security, thus, you will not be given tax credit.