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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