Guarding Your Small Business From an IRS Audit

By Colleen DeBaise

Let’s start with the good news: There’s a relatively small chance you’ll be audited this year.  Generally speaking, IRS agents examine only about 1% of returns – both individual and corporate – in any given year.  Those are pretty good odds, by anyone’s standards.

But, there’s bad news, too. If you’re a business owner, your chances of attracting more scrutiny are higher.

Why? For starters, you may take an enormous number of (legitimate) deductions … and while it’s a benefit to write-off many expenses related to business, the IRS may take a second look if deductions are unusually high compared to income.  And if you’re self-employed, the IRS may be particularly wary that you’re under-reporting your taxable income.

One big red flag: If you file a Schedule C – the tax form that shows profit or loss from a business, which sole proprietors typically file — IRS statistics indicate that you are 10 times more likely to be audited.

The Wall Street Journal’s Small Business team asked Barbara Weltman, the guru of small-business taxes, to prepare a check-list of ways to avoid an audit. Weltman, author of “J.K. Lasser’s Small Business Taxes,” says there’s no way (unfortunately) to completely audit-proof your business.  Her suggestions, however, can hopefully keep the IRS at bay and give you some peace of mind this tax season.

Among them: Choose your tax preparer with care.  According to Weltman’s guest column, if the IRS believes a preparer is claiming unwarranted deductions or taking other fraudulent steps on clients’ returns, then the preparer’s clients are at risk for audit.

Another tip: Avoid claiming deductions that raise IRS red flags. You might deserve them,  but be prepared to prove you’re entitled if the IRS pays extra attention.

For eight more ways to avoid an IRS Audit, you can read Weltman’s column.