The fear of being audited keeps millions of small-business owners up at night, especially during tax season. While the number of tax returns audited each year is around 1 percent of total returns filed, that doesn’t do much to pacify the fears of tax filers. Small-business owners and self-employed people with higher incomes are at a greater risk of being audited in part because it is easier for them to manipulate revenues and expenses to reduce their tax liability. Last year, over 100,000 tax returns with income above $200,000 were audited. Most of these audits don’t take place in a dimly lit room with an interrogation light shining in your eyes; instead they take the form of information requests sent by mail. But to be sure, it's best to avoid even these by following some simple steps:1. Don’t under-report income.
If you receive a 1099 form from a client, that is a clear sign that they reported the same amount to the IRS. Failure to report income that the IRS knows you received is a red flag that could make them curious about other parts of your return.2. Don’t abuse the home-office deduction and travel expenses.
You have the right to claim legitimate business expenses as deductions on your tax return. The problem arises in the gray areas where an expense is personal but could pass for a business expense. Resist this temptation, including vacations that are “sales meetings” and basement party rooms that are “home offices.”3. Watch your social media activity.
There are documented cases of state-level tax authorities finding information on Facebook and Twitter that leads them to launch investigations. If your small-business profits barely break $100,000 per year, it's a bit difficult to explain pictures of your new Lamborghini on Facebook or your Tweets from a nightclub in St. Tropez.
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