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How to Avoid an IRS Tax Audit

Tax season has come and gone, and I know all of you are glad it is over. While I’m sure no one is too thrilled about filing their taxes, for small business owners it is a hard and complex task, especially after new taxes and deductions were added during this year’s fiscal-cliff legislation. But what could be worse than filing your taxes? Probably an IRS audit.

According to an IRS report, if you make less than $200,000 a year, your chances of being audited are a little bit over one in one hundred—pretty high chances if you ask me. If you make over $200,000, the chances go up to four in one hundred.

While there is no real way to avoid audits completely, as the IRS chooses some of its audit cases randomly, there is a way to avoid raising the IRS’s red flags. Here are a few tips on how to do just that.

Try to avoid claiming expensive travel and entertainment expenses. Even though it is tempting to include travel and entertainment expenses on your Schedule C, be careful and meticulous when you report these expenses, as they are closely examined by the IRS. Make sure you have all the information you need to prove that these expenses are business related and legitimate before you ask for them to be deducted.

Another closely examined expense relevant to SMB owners is business-vehicle usage. Business vehicles are almost always used for personal purposes as well. Here too, you have to make sure you have all the information the IRS requires to prove when and how the car was used for business reasons.

Being consistent in your filing from year to year is also important, as the IRS also tracks filing patterns. Therefore, if this year’s deductions and income are dramatically different than last year, be extra careful and make sure you have everything in order. If you have any unusual filing, it is recommended to attach all the needed supporting documents with your original tax filings to avoid further inquiry by the IRS.

Last but not least, you are better off filing taxes electronically. Handwritten tax forms are perfectly legal but are more prone to mistakes and miscalculations. Moreover, if you are an early filer, filing your taxes online might mean expedited processing and receipt of tax refunds.
I hope these tips were helpful, but I’m sure there are many more great tips. Do you have any? Share here!!

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