Tax Advice for Business Owners
How to Avoid an IRS Audit
Written by Alan Olsen for Gaebler Ventures
Want to know how to avoid an IRS audit? If you are a business owner, getting audited by the IRS can quickly derail any progress you are making in growing the business. As such, it's smart to take steps to avoid an IRS audit in the first place.
There is no way to completely avoid being selected for an audit.
However, if you follow these tips, you can minimize the likelihood of your being audited.
Six Tips to Lower the Chance of an IRS Audit of Your Tax Return
- Be Honest. If you live by the simple rule of honesty, it will save you a lot of stress. It is wise to see that all of your expenses and deductions are accurate when recorded on your tax return. Mistakes happen, but avoid intentional ones.
- Be Organized. It is important to keep good records. Properly record any expenses that you are deducting on your tax return. As a business owner, you can deduct business-related expenses such as travel, meals, and mileage, as long as they have been recorded. If the expense is minimal, a simple note written in a notebook or on a spreadsheet will work, but if the expense is large, keep the receipt. A receipt will help to prove an accurate deduction.
- Report All Interest. Collect all appropriate tax documents when your tax return is prepared. If your bank or other investment companies have not sent you 1099s for interest on accounts, contact them. The IRS has record of these documents and so you need to record them on your tax return. If the IRS has a 1099 form that reports interest, yet you do not record that interest on your tax return, it could raise a red flag.
- Prepare Well If You Are Self-Employed. The IRS realizes that self-employment increases the likelihood of unreported income. You must have proof of your income and business expenses if you are self-employed. In addition, make sure you do not record personal expenses as business deductions.
- Watch Your Deductions. If you take deductions that are unreasonable for your income bracket, this may trigger an IRS audit flag. The process that the IRS uses to select returns to audit starts with the IRS computer. The IRS computer gives each tax return a Discriminate Function Score (DIF score). During this process, the deductions that you take are compared to other scores within your income bracket. High scores result from unrealistic deductions within certain tax brackets. If a return receives a high score, it will be passed on to an IRS agent for review to see if any additional tax can be collected. If your deductions seem a bit unrealistic, you should have proof to back them up.
- Use a Tax Professional. A tax return that is prepared by a CPA or other accounting professional is less likely to be selected for an IRS audit than a self-prepared return. A professional knows the laws and can help you to make sure that all proper deductions are taken and that all income is reported.
The bottomline? You cannot completely avoid an IRS audit. Nonetheless, taking these steps in preparing your tax return can help you to avoid possible red flags that could lead to an IRS audit.
Alan Olsen, CPA, MBA (Tax), is managing partner at Greenstein, Rogoff, Olsen & Co., LLP (GROCO). Known in the industry as the Tax Ninja, Alan is a recognized expert on a wide range of tax and accounting subjects. He brings more than 25 years of invaluable expertise in public accounting to tax planning and strategies for venture capitalists, entrepreneurs and everyday people.
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