If you are a small business owner filing your tax return, there are probably few things you fear more than the dreaded audit. In reality, very few tax returns are audited, and those that often trigger a 'red flag' that is identified by the IRS discriminate function system computer program. It's worth focusing on these key areas when filing your tax return to minimize your chances of an audit:
Last tax season, almost 11 percent of those earning over 1 million dollars were audited, as compared to under 1 percent of those making less than $300,000. Make sure your records are complete and accurate if your company will be declaring earnings of over a million.
When figuring out deduction amounts that seem realistic and reasonable, tables are used by the IRS, and deductions that seem too large for a specific income range can lead to an audit. Always keep complete records of any applicable deductions you take when filing your taxes, especially if they seem higher as you were just starting up your business.
Figures that don't quite add up as they have been rounded up or down can be a red flag and lead to an unwanted audit, using the logic that a mistake there may be an indication of errors in other areas. So if you made $80,004.47 make sure you put that exact amount and not $80,000.
Don't be tempted to claim a corner of your bedroom as a home office, as the room is obviously for personal use too. Areas in your home must be exclusively used for business purposes in order to qualify as a home office.
Make sure you aren't breaking the law by claiming hobby expenses as a business loss. If your company is experiencing a few lean years, be sure to keep all the necessary paperwork to document the losses; otherwise, the IRS may assume that you are trying to avoid paying tax by claiming deductions you aren't entitled to.
Although you can and should file a Schedule C if you qualify for it, be careful of using this to lower your taxable income if you don't really qualify. Again, accurate and complete paperwork will help you in the event of an IRS audit.
Suspiciously high claims for entertainment are obvious triggers when it comes to an audit, and if you incur entertainment expenses, be sure to keep detailed receipts and records of each trip. But just remember that family trip to the Caribbean written off as a legitimate business expense can understandably look suspicious. And if you travel for business, keep all receipts for expenses over $75.
An audit may be in your future if you use both your actual expenses and the standard IRS mileage rate, so you have to choose one or the other. Precise vehicle records should be kept if you do claim your car for 100 percent business use.
Kiplinger also offers a free useful calculator to assess your risk of an IRS audit.
