The nightmare scenario that every business owners dreads is an IRS audit. It brings your business to a halt and it can get much worse once the books are open. However, certain things make auditors more likely to target your business. Read on and adapt accordingly.
The nightmare scenario that every business owners dreads is an IRS audit. It brings your business to a halt and it can get much worse once the books are open. However, certain things make auditors more likely to target your business. Read on and adapt accordingly.Though she points out that the odds of being audited are slim, Rhonda Abrams, president of The Planning Shop, doesn't see any reason to tempt the auditor either. Sure, you can appeal, but avoiding the audit altogether will save you time, money, and headaches. With input from accounting firm BDO Seidman, Abrahams has compiled this list of 9 things that increase your chances of an audit:
Hiding Income -- Gas station convenience stores were one of the most audited businesses. Why? Lots of people pay with cash. If you get paid in cash, rather than by check or credit card, it's tempting to just 'forget' to declare some of that income. That's a huge IRS no-no.
Making More Than A Million Dollars -- Have an adjusted gross income of more than a million dollars? You'll have the highest chance of getting audited. In 2008, according to the IRS, they audited 5.6 percent of millionaires' returns, compared with 2.9 percent of those making more than $200,000, and less than 1 percent of those making less than $200,000.
Mixing Personal And Business Expenses -- It's tempting to write off your new living room furniture or that trip to the Caribbean as a business expense (after all, you read e-mail while sitting on the couch or at the beach, right?) but the IRS certainly frowns upon that.
Entertaining -- Another area where personal and business expenses are likely to be construed as intertwined. Also, the IRS doesn't want to see excessively lavish parties (except, it seems, from huge banks getting TARP money, but that's another story). Remember, you can only take 50 percent of entertaining and food expenses as a deduction
Losing Money More Than Three Out Of Five Years -- The IRS is on the lookout for people writing off hobbies as businesses (so forget buying those expensive cameras and calling yourself a pro photographer). They want to see that you've at least had the intent to make a profit.
File A Schedule C Return -- If you're a sole proprietor, you'll file a Schedule "C" -- Profit or Loss from a Business -- as part of your 1040 form. BDO Seidman says the IRS is scrutinizing Schedule Cs more closely this year, so make sure you have proper documentation. But unless you're incorporated, you'll need to file this form. And according to an SBA report released just April 2, 2009, sole proprietors pay half the effective tax rate of S corporations (13.3 percent versus 26.9 percent).
Taking The Home Office Deduction -- If you work at home, remember you need a section of your house exclusively used for business to qualify for a home office deduction. The IRS particularly likes to challenge this.
Using Your Car For Business -- Like entertaining, this is another area the IRS thinks has the possibility of being misused. You're less likely to be audited if you have a separate personal car. But you've got to see customers face-to-face to keep them loyal. And this year, the mileage rate deduction was increased: 50.5 cents per mile from 1/1/08-6/30/08 and 58.5 cents the rest of the year.
Filing Early -- Because fewer returns are filed early, BDO Seidman claims you'll have a lower chance of being audited if you file closer to deadline. So thumbs up on your procrastination!
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