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June 2007 — Vol. 85, No. 5

SMALL BUSINESS

How to minimize the chance
of an audit

 

Of the more than 100 million tax returns submitted to the IRS each year, fewer than 2 million are subject to closer examination. However, being a small-business owner can put you at greater risk for a random audit. Audits can be costly and time-consuming for a small business, but being better prepared can make the process less painful.

Macey Davis, tax counsel for the National Federation of Independent Business, offers five tips on how to protect your small business if the IRS comes knocking.

  1. Keep original receipts. Keep tax records and corresponding documents organized and easily accessible for at least seven years. The IRS has up to three years to audit your return and six years to come after you if they think you have underestimated your income by at least 25%. It’s a good idea to attach copies of original receipts, checks or insurance reports to your returns. If your tax return is tagged for additional scrutiny, having the documentation attached could eliminate the need for a larger audit.
  2. File electronically. It is easier for the IRS to keep track of the return when it is filed electronically. Filing electronically means your return goes directly into the system without any eyes looking at it, which means there’s no screening by lower-level clerks.
  3. Know when to file. It’s a myth that getting an extension will increase your chances of being audited. It’s more important to take the time to get it right. If you have a big refund coming to you, file early and get your money back. If you owe taxes, avoid filing too early. Tax payments made prior to April 15 for the previous year’s tax liability are interest-free loans to the IRS.
  4. Avoid handwriting your return. Math errors on returns that have been handwritten are common, so the IRS will look for those — and then they’ll look for other errors.
  5. Be careful with home-office deductions. Though the home-office deduction is another red flag for the IRS, business owners should not shy away from taking it if they are eligible. It’s best to consult with a tax professional to help determine if your home office qualifies for the deduction.