Tax Tips

As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% and 30% of the original purchase price.
There are several other tips that the taxpayer can use to ensure that he or she is valuing donated goods at a "fair" price. Aside from the 30% and under rule mentioned above, consider having an appraiser write a letter. (In fact, for individual items valued at $5,000 or more, an appraisal is required.). Another benchmark the IRS uses that could come in handy is the willing-buyer-willing-seller test.

This means that taxpayers should value their goods at a point or price where a willing seller (who is under no duress) would be able to sell his property to a willing buyer (who also is under no duress to purchase the item). Using such a benchmark will keep you out of trouble and prevent you from placing an excessive value on your dad's old Frank Sinatra albums.

While this may sound simple, many returns are selected for audit due to basic math errors. So when filling out your tax return (or checking it after your accountant has completed the form) make sure that the columns add up. Also make sure that the total dollar value of capital gains and/or losses are properly calculated. Even a small error can cause attention.

 

A large percentage of folks simply forget to sign their tax returns. Don't be a part of that number! Failure to sign the return will almost guarantee that it will receive additional scrutiny. The IRS will wonder what else you might have forgotten to include in the return.

Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset (such as a home) to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.

 

Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.

For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.

Deduct only items that were used in the course of your business, and make sure you have proper backup.

 

There is nothing the individual taxpayer can do about this one, but if you earn more than $100,000 each year, your odds of being audited increase exponentially. In fact, some accountants put the odds of being audited at one in 72, compared to the one in 154 odds for people with lower incomes.

 

If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.

Small business owners are an easy target - particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.

Incidentally, other actions that go part and parcel with business ownership may draw unwanted IRS interest too, including putting family members on the payroll and over-estimating expenses.