Nov 09, 2009

Top IRS Audit Concerns

Most small businesses have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides to audit, how likely it is that you'll be audited, and what you can do to avoid being one of the unlucky ones. Let's take a look at some of the things that are most likely to draw the attention of the IRS. That way you can take steps to avoid that unwanted attention--or come out of an audit unscathed if you find yourself in the government's crosshairs.
When auditing small business owners, the IRS is most concerned about whether you have done one of the following:
 Underreported your income. Unlike employees who have their taxes withheld, business owners who are not employees have no withholding--and many opportunities to underreport how much they earned, particularly if they run a cash business.
• Claimed tax deductions to which you were not entitled. For example, you claimed that nondeductible personal expenses, such as a personal vacation, were deductible business expenses.
• Properly documented the amount of your deductions. If you don't have the proper records to back up the amount of a deduction, the IRS may reduce it, either entirely or in part. Lack of documentation is the main reason small business owners lose deductions when they get audited.
• Taken business deductions for a hobby. If you continually lose money, or you are involved in a fun activity such as art, photo¬graphy, crafts, or writing and don't earn profits every year, the auditor may question whether you are really in business. If the IRS claims you are engaged in a hobby, you could lose every single deduction for the activity.

For more information on this and other small business tax deductions issues, see Deduct It, by Stephen Fishman.