NFIB

4 Ways to Avoid an Audit
03/ 28/ 2002

by John Shiffman

The odds aren't good: experts say small business owners are audited at four times the rate of other taxpayers.

Know what draws red flags from the IRS and you have a better chance of escaping their scrutiny, says Frederick Daily, above, a California tax attorney and author.

1. Fill out every line on the tax return. "The IRS gets about 110 million returns a year, so they don't have the time and personnel to look at every return closely," Daily says. "They computer-score them, and missing information can cause your return to be kicked out of the normal process. Then someone's going to look at it, and ask questions about it, or worse, notice other things that don't look right."

2. Submit a return that looks professionally prepared, preferably one composed by an accountant. At a minimum, use a computer, and if possible, a software program designed to calculate and reproduce the tax forms. IRS agents tend to give hand-written returns closer scrutiny.

3. Double-check your math. Obvious errors are likely to draw audits.

4. Don't use round numbers. It's a clear tip to the IRS that you are merely estimating expenses, income or deductions--and that you may not have the receipts to back up your claims. "Real life doesn't work in round numbers," Daily says. "The IRS knows this."

The IRS isn't about to reveal its secret formulas for choosing who gets audited. But Ray Smith, who supervises a relatively new national IRS audit unit aimed at small businesses, says some of Daily's advice is sound--and says some of it isn't. He says it makes no difference whether a return is computer-composed or hand-written. "What matters is the information on it," he says. But the IRS agent says Daily's warnings about double-checking math and using too may round numbers are well taken.

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This article originally appeared in the March/April 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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