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Grow Your Business Finances

How to Avoid a Small Business Tax Audit

How to Avoid a Small Business Tax Audit   / Credit: Taxes ahead sign via Shutterstock

Just because tax season is over doesn't mean you don't have to think about your taxes anymore. In fact, small businesses are particularly in danger of being audited by the IRS. That's why now is a great time to make sure your tax planning strategy is solid and to know how to avoid an audit.

Steven Aldrich, CEO of Outright, an online accounting system, offers small business owners five tips on how to avoid a tax audit.

  • Consider using tax software or a tax professional to complete your tax return. Using professionals or software help you to avoid red flags for audits. For example, some tax software actually provide a risk assessment showing you items that might be red flags.
  • Keep business expenses separate from personal expenses. If you use a separate credit card for your business expenses, you can keep those expenses separate from your personal activity. The IRS is often on the lookout for personal expenses being reported as a business expense, so this will help ensure that you comply.
  • Always report your full income.  Many well-intentioned business owners will under report their revenues because they report the net revenues rather than the gross revenues.  For example, if you receive a customer payment via PayPal, that payment will already have the PayPal fees taken out.  You need to remember to report the gross income (the amount before the fee was taken out). The fee is then reported as an expense, which reduces your taxable income.
  • If you are claiming unusual deductions, make sure to spell out what the deduction is for so that the IRS can verify it. Claiming a "miscellaneous" deduction can be a red flag.
  • Meet the tax deadlines!  Being late on your deadlines can raise red flags with the IRS because you appear unorganized. This includes meeting the quarterly estimated tax deadlines and sending out your 1099s on time.
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