Did you know that as a small business owner, you’re more likely to be audited by the IRS? It’s true. 1.5% of all tax returns submitted with a Schedule C are audited, compared to just 1% of those filing with W-2’s only. This is largely due to the widespread misuse of the Schedule C to report losses on a “hobby” business while employed at a “regular” wage or salaried job.
So, how can you minimize your risk of being audited? You may already be at an increased risk, but following some of the steps below can reduce that risk and ease your audit experience if the tax man does decide to pay a visit.
1) Hire a professional. A professional tax preparer or personal accountant is an invaluable resource in helping you navigate your tax burden. They’re aware of common tax mistakes that the IRS looks for, like incomplete tax returns, unreported or suspiciously low income, round numbers, or disagreements between your state and Federal tax returns. They can work with you to correct these errors before your tax return is filed, reducing your risk of an audit.
2) Document all income sources. You should be reporting these sources of income on your Schedule C. All four quarterly employment tax returns should be kept and filed in case they’re needed to support deductions taken for salaries and wages paid to employees. For the same reason, be sure to keep copies of all form W-4 and W-2 for your employees.
3) Take only deductions you can substantiate. This goes with tip #2. If you keep accurate, meticulous records of your deductions, you have every right to take them. Just know where your paperwork is.
4) Know what the IRS is looking for. Are you writing off business entertainment expenses with clients? In addition to keeping your receipts, use a spreadsheet to record the date, place, amount spent, the name of your guest, and your business relationship with the guest. Do the same with any items you buy for your business. Keep your receipts, and record the date, place, amount spent, and how you are using the item for your business. Physical inventory sheets, canceled checks, receipts, and information or figures concerning the costs of the inventory will also be useful.
5) Be honest. Don’t try and fudge your numbers. Just don’t. It always comes back and bites you in the end. Report all income and seek the advice of a qualified tax professional if you’re feeling overwhelmed.
Tags: Entrepreneurship, Tax Tips
This entry was posted on Thursday, June 25th, 2009 at 2:17 PM and is filed under Tax News. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
