Being a self-published author means acting as a small business owner, with all the details and income reporting that implies. You want the income (!), but what you don’t want is to attract the notice of the IRS. Diane Kelly is an author as well has having a background in tax information. We’ve asked Diane to share how to make sure you stay on the right side of the taxation law. Here’s Diane’s advice:
While it’s a wonderful thing when an author and his or her books get noticed by readers, getting notice from the Internal Revenue Service (IRS) is anything but pleasant. Knowing what items might trigger an audit can help a writer avoid problems with the IRS or be prepared in case an auditor comes around asking questions.
So how does the IRS decide which returns to audit?
Some returns are chosen completely at random. There is nothing a taxpayer can do to decrease the chances of being randomly selected for audit. However, some returns are targeted for audit based on a computer scoring system, known among tax professionals as the “DIF System.” “DIF” stands for “Discriminant Inventory Function System.” Under this system, the IRS reviews the numbers on your return to determine if they fall within the typical range for your income level and type of business. While numbers outside the expected range might very well be legitimate, such figures could indicate that an error was made on the return or that the numbers were purposely misstated. For instance, if your meals and entertainment expenses are unusually high relative to your income, your return may generate a high DIF score and, in turn, an audit. The IRS may also decide to audit your return if the amounts reported on your return do not match information provided to it by third parties. For example, the IRS will demand an explanation if the amount of revenue reported on your Schedule C is less than that reported on 1099 forms filed by those who issued payments to you, such as your publisher or an online bookseller site.
What can you do to decrease your risk of audit?
First, provide adequate detail on your tax return so that it raises as few questions as possible. For instance, when filling out your Schedule C, rather than lumping small expenses such as magazine subscriptions, books, and internet charges into a catch-all category identified as “miscellaneous,” detail these expenses individually. Attach a written explanation of anything unusual or confusing on your return. You’ll spend a little extra time filling out your return, but providing the extra information up front could save you from an audit later.
Be careful when hiring a tax professional. You want a preparer who isn’t wimpy, yet you want one who is honest. If any of the numbers on your return don’t make sense to you, question the preparer and make sure you are satisfied with the explanation. An abusive preparer can increase your risk of audit.
File on time. Late returns cause you to lose credibility with the IRS and can trigger an audit. You are entitled to an automatic six-month extension if you can’t file by April 15th, but you must file Form 4868 to notify the IRS that you are exercising your right to the extension. Be aware that the extension only gives you additional time to file your return, not additional time to pay any tax due. You will be charged interest and possibly a penalty if you owe additional tax when your return is filed.
Finally, though debated among tax pros, some believe you may decrease your chance of audit by filing on or just prior to the April 15th deadline, when the IRS is inundated with returns and allegedly less likely to select your return for audit.
What are the most common audit items?
Mileage is one of the primary deductions targeted for audit among self-employed taxpayers. Few people keep the requisite documentation to prove their mileage and, as a result, many lose out on their deductions. Don’t become one of them! I recommend you keep a mileage log in the format set out on page 27 of IRS Publication 463-Travel, Entertainment, Gift, and Car Expenses. You will note that the log requires you to enter various pieces of information, including the date, destination, business purpose for the trip, total miles driven, and beginning and ending odometer readings for each trip. The odometer readings enable the IRS to verify the validity of your log during an audit by comparing the mileage on the log to that noted on receipts for repairs or oil changes.
Because taxpayers sometimes try to deduct a personal vacation on their returns, travel expenses are also a common audit item. Be sure to keep receipts for all business-related travel. If you made a trip for research purposes, such as a trip to the Grand Canyon to study it as a potential setting for one of your books, be prepared with extensive notes and photographs that show how the trip was helpful in creating your work.
Meals and entertainment are also regularly questioned during an audit. Be ready to show how these costs were helpful to your business, and be sure to note on the receipt the names of any person(s) with whom you attended the meal or entertainment.
Home offices are no longer the immediate red flag they used to be, especially for writers who can be expected to work from home. If the home office expenses are substantial, however, the IRS is more likely to question both the amounts and whether the taxpayer meets all of the qualifications to deduct the expenses.
Regardless of the items questioned, good documentation is essential to winning an audit, so make sure you have some type of record-keeping system in place so that your receipts and other supporting paperwork will be easily accessible if the IRS asks for it. Provide only what is requested so that you do not inadvertently raise additional questions, and be sure to hire a tax professional to represent you in the audit if a significant amount of money is at stake.
Diane Kelly spent over two decades working as a tax preparer and advisor before retiring to write full time. She is the author of the humorous IRS Special Agent Tara Holloway series and the Paw Enforcement K-9 cop series published by St. Martin’s Press, as well as several self-published works. Find Diane online at www.dianekelly.com, on Twitter @dianekellybooks, and on Facebook at www.facebook.com/dianekellybooks.
1 comment
Not convinced Oxford always has it right:
Book Dedication:
“To my mother, Ayn Rand, and God.”
Analysis: So really this book is dedicated to only two people.
Source: http://goo.gl/hOCBWK