Are You Facing an I.R.S. Tax Audit?
Introduction
A tax audit is defined as an examination by the Internal Revenue Service (IRS) of an individual or a corporation’s tax return to verify that the return is accurate and complete. A tax audit is not pleasant, especially considering that ninety percent of audits result in the taxpayer owing money. It is an experience every sane businessperson strives to avoid. CPAs say the best way to avoid a tax audit is to file a complete and accurate tax return. No question about it, the prospect of a tax audit is scary, and the key to surviving it is to keep good records.
Business
An audit can be one of the most feared events of a business’ or individual’s life. One of the biggest and most commonly audited items by the IRS for individuals in their own business, and employees of companies who use their own car in business, is the tax deduction for business transportation. A very common reason people get audited is when they try to take deductions for exceptionally large expenses, or expenses that they cannot provide receipts for, such as the use of a personal car for business purposes.
For starters, as a small business owner, you’re four times more likely to be audited than the average person. With small business audits happening more frequently, it is more important than ever to know what it is that triggers an audit, how to avoid being audited and what to do if the IRS is after you. And then if you’re audited, you’re going to have to prove those numbers.
Conclusion
A tax audit is nothing more than the IRS requesting “proof” for the deductions on your return. And one of the best ways to prepare for a tax audit is to have your tax returns produced by a professional tax person. The #1 red flag that will trigger a business tax audit is to claim fabricated business expenses. The other red flag is mixing your own personal expenses with your business expenses. You can avoid this flag if you set up your business entity correctly using a simple structure such as an LLC, partnership, or S-Corporation. If you start you business out on the right path from the beginning, you will greatly reduce your chances of an audit.
The other advantage of setting up your business structure correctly, besides avoiding an IRS audit, is that you can start building your business credit profile. When you get your business “creditworthy” then you won’t need to use your personal paycheck to fund your daily business expenses. Thus you can keep the separation between the business and personal – which is a major key to avoiding a tax audit.
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Thank you Tommy. I appreciate your feedback.
I’ve been active in taxes for lengthier then I care to admit, both on the individual side (all my employed life history!!) and from a legal stand since passing the bar and pursuing tax law. I’ve provided a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please carry on the good work – the more people know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.
I’ve just started learning how to apply for money for my business and this book shoudl help me.
I like your article. You made a good point about “large” expenses. People think they can claim anything, and all it does it get them in trouble.
Good old Uncle Sam. Always trying to get money out of the little guy. That’s why we have to be smarter and get the right tools so the IRS doesn’t get their chunk of money. I like your article. I hope you write more than this one.
Isn’t that the pits that the little guy is the one the IRS comes after? We’re the ones with the most to lose if we don’t understand the law.
Good freebee. Thanx.
I agree too. The IRS is not something you want to mess around with. I’m going to get the ebook you mentioned in your other article so I can be sure I’ve set up my new business correctly. I like the freebees too. Thank you very much.
I’m an accountant and I know that facing the IRS is no fun. I’ve been telling my friends about your eBook and I highly recommend it.
I hate the IRS. I do everything by the book to avoid an audit.
I agree, but trying to keep you personal separate from your business is tough when you don’t have any money to spend on your new business but your own paycheck. I like what you had to say, though.
I agree with Liz. She told me about this article on your website and I think it’s really good. I’m going to read a little more and probably buy your book. I’m starting up a small store front business and I want to be sure I’ve checked out all the resources that can help me.
Yeah, getting audited is one scary experience. I went thru one and didn’t like it one bit. Yuck!