Avoiding IRS Audits - Small Business Tips

The only thing worse than losing a potential tax deduction is getting caught taking one which you don’t qualify for. An IRS audit is every small business owner’s worst nightmare. This is true at least for those who have already faced an audit. This article is primarily meant for those who have as yet not experienced the sheer strain of an IRS audit, and as such, are unaware of the devastating effect this can have on your business. At the very least, it is quite possible to reduce the chances of your being audited, while at the same time ensuring that you have the necessary documentation to back up deductions which might possibly come under the spotlight.

First thing you need to know is that you need to keep your deductions well inside the average for your type of business. If your deductions are way above the average, it will automatically trigger an audit, even if you have rock solid documentation for the deductions.

Secondly, make sure you do not fill out the tax returns by hand. If even one word or letter is incomprehensible or you make a simple error, the auditor might be inclined to take a second look, this one much more deeply. Use a software or tax filing program to prepare the returns.

Never make assumptions. What may sound obvious and transparent to you may not be so for an auditor. Attach all possible documents to ensure that every deduction appears explicitly legitimate.

As far as possible, avoid deductions which are regularly audited by the IRS, such as home office deductions. If you do avail of these, make sure that you attach more than sufficient paperwork, but more importantly, make sure that you have followed the IRS rulings related to these deductions.

For example, if you are asking for a deduction for a computer in your home office, can you prove that your family members have not and will not be using it for personal reasons? One of my clients installed a closed circuit camera which covered the area reserved for the home office, and maintained round the year video recordings. Along with his deductions, he included time and date stamped snapshots of the videos, with a note that indicated he had video proof that no one else used the facilities provided for the home office space. Read the relevant regulation carefully, and include these deductions if, and only if, you can prove on paper that you are qualified for the specific deduction.

Things to remember:

• Do not round off figures. Take the time and trouble to check your bills and records, do exact calculations and provide accurate figures. Make sure it adds up.
• If your tax filing gets too complicated for you, consult with a CPA. It’s not necessary that you do this, but sometimes, it is better to make sure, especially if you have doubts about the legitimacy of your deductions. A CPA may also be better equipped to calculate the net benefits of things such as incorporating your business, when compared with the costs.
• The IRS compares 1099, W-2 and other forms against your tax returns to sniff out unreported income. Report all your income, big or small, and make sure you have a record and bills for all expenses. Most often, it is the basics that trip you up, rather than some intricate tax strategy.

In summary, it is wise to remember that even if you do end up on the wrong end of an IRS audit, all it means is additional taxes and fines. The hard part is the time spent trying to get it sorted and the incredible amount of extra paperwork necessary to get it done. If you want to avoid the hassle, be methodical, maintain perfect records and follow the book. That’s all it takes.