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5 Ways to Avoid a Tax Audit

It's that time of year when you are feverishly trying to complete your tax returns. As you’re collecting documents and crunching numbers, here are five tips to remember to help you avoid getting audited.

1. Report All of Your Income

An easy way to get audited? Failing to report all of your income. For example, if you own a studio, and you teach some workshops, host retreats, or have private clients on the side, make sure you accurately report all of the money you are bringing in across your various income streams.The Internal Revenue Service (IRS) uses the information on Forms W-2, 1098, and 1099 to compare the income and deductions you report on your return with the information reported by others, such as employers, financial institutions, and other businesses. Any discrepancies between reported income amounts will likely provoke further investigation from the IRS.

2. Check (and then Double-Check) Your Math

Make sure that your numbers match those on forms submitted to the IRS by employers, financial institutions, and other businesses. The IRS electronically verifies those numbers to ensure that there are no discrepancies. Then, double-check your numbers and your calculations. To minimize mistakes, it might even be helpful to use tax preparation software or apps to prepare and electronically file your return.

3. Separate Business and Personal Expenses

If you are a self-employed yoga instructor or studio owner, you may think it is harmless to file personal expenses as business expenses, but you should resist the temptation. The IRS is strict about business owners separating personal and business finances. Unless your business operates as a sole proprietorship, you are legally required to manage your business and personal expenses in separate accounts.

4. And then Mind those Expenses

To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your yoga business. The question to ask is: Was the purchase absolutely necessary to perform your yoga duties? The IRS often scrutinizes the distinction between a hobby and a business - often referred to as the "hobby-loss" rule. According to the IRS, if you have an activity that is not designated as a business, then the "allowable deductions cannot exceed the gross receipts for the activity." Maintaining financial records and utilizing proper bookkeeping principles will prove the accuracy of your reported profit margins; thereby, verifying that you're operating a legitimate business, and that you are not claiming excessive deductions on a hobby.

5. Maintain Organized Records

Keep good records. This not only will help you prepare an accurate return, but also will make it easier to substantiate anything the IRS questions in the event your yoga business is audited. Be ready to verify any claims with receipts, or other documentation.

Remember, if your studio or yoga business is audited, don't panic! Selection for an audit does not always suggest there’s a problem. The IRS is only conducting a review of your yoga business's accounts and financial information to ensure information is reported correctly and to verify the reported amount of tax is correct.

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