Fear of an IRS audit is a tangible thing in the lives of many people. Even if they have diligently paid all their taxes and reported every penny they still have a fear of an audit. Audits can lead to loss of income, seized property and sometimes even a jail sentence. As a small business consulting coach who has been around small business owners for a long time, I can tell you that I have just about seen it all.
If asked to choose between an audit and a root canal without anesthetic, most would surely choose the latter. Audits are given indiscriminately; the fact is if you live long enough your chances of being audited increase every year. If you are the sole proprietor of a business you have to file a schedule "C" with your personal tax return this is like waving a red flag at a bull when it comes to the IRS. Read on to find practical ways you can avoid the risk of being audited by the IRS.
1. Make sure you send in clean and neat paperwork. Do not omit any important information. Double and triple check the return if necessary. It is often something very small that will attract the unwanted attention of the IRS audit team.
2. Reporting a very low income without appropriate loss statements. There are certain income limits associated with each field of business and although it is a fact of life that it is possible to make what is expected this unfortunately will give rise to an audit. That is why it is imperative that you be able to prove why your income was low.
3. Report all income from every source. One tiny over site can get the attention of the auditors. This is especially a problem for freelancers and people who get paid on a per job basis. When you do jobs for companies, they report to the IRS what they paid you in their own filing, so it is already in the IRS records. What you report to the IRS must match up. For instance, if you are a freelance web developer, and you buy web hosting for your clients, you MUST include the cost from the web hosting company AS WELL AS the revenue you client pays you for those services. If the IRS detects that you recieve income for this service (however miniscule) but don't report it, your failure to report it will most certainly create an incident.
4. File a tax return even if the income is miniscule. Failure to do so will definitely raise flags at the IRS.
5. You can review the guidelines that the IRS uses to go over returns. The tax examiners have a list of things they are trained to look for. By studying these you can make sure your return is within these guidelines. The information can be found on the official IRS.gov website.
Do yourself a favor and avoid being audited by following a few simple steps. You are at risk if you are a cash only business, law office, construction and small retail shop owner.