02/ 02/ 2007
by Lena Basha
Five ways to escape IRS scrutiny
Chances are slim that you'll ever be audited. Of the more than 100 million tax returns submitted to the IRS each year, fewer than 2 million are subject to closer examination. But the more money you make, the more scrutiny you'll receive--and the fact that you're a small-business owner puts you at an even greater risk for a random audit.
Being afraid of an audit is common--and natural, says Roy M. Quick Jr., EA, who owns St. Louis-based Quick Tax & Accounting Services with his wife, Edith. "It can unnerve you and your employees, and if the tax examiner is on-site, it can have an effect on your customers, too."
Audits can also be costly and time-consuming for a small business, says NFIB Tax Counsel Macey Davis. But being better prepared can make the process a little less painful. "The best defense against an audit is preparation," Quick says. "When you're preparing your return, plan on being audited." Follow these tips to protect your business if the IRS comes knocking:
Keep original receipts
Keep tax records and corresponding documents organized and easily accessible for at least seven years. The IRS has up to three years to audit your return and six years to come after you if they think you have underestimated your income by at least 25 percent, Davis says. She also suggests attaching to your returns copies of the original receipts, checks or insurance reports for large deductions. "If your tax return is tagged for additional scrutiny, having the documentation attached could eliminate the need for a larger audit."
File electronically
"The IRS can't lose any part of the return when it's filed electronically," Quick says. "And when you file electronically, your return goes directly into the system without any eyes looking at it, which means there's no potential for screening by lower-level clerks."
Know when to file
It's a myth that getting an extension will increase your chances of being audited. It's more important to take the time to get it right. Have your return prepared early. If you have a big refund coming to you, file early and get your money back. If you owe taxes, avoid filing too early. Tax payments made prior to April 15 for the previous year's tax liability are interest-free loans to the IRS.
Avoid handwriting your return
"Math errors on returns that have been handwritten are common, so the IRS will look for those--and then they'll look for other errors," Quick says.
Be careful with home-office deductions
Though the home-office deduction is another red flag for the IRS, Quick says business owners shouldn't shy away from taking it if they're eligible. "We had a client who came to us after doing his own taxes," Quick says. "He had a home office but was too afraid to take the deduction. We amended three years of returns and got him more than $5,000 back." Davis suggests consulting a tax professional to help determine if your home office would qualify for the deduction.
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