Self Employed? ? 8 Tips to Avoiding an IRS Audit

If you are running a small business and filing your taxes on the Schedule C of the tax return form, then you need to be aware that the IRS scrutinizes such filers and that your chances of being audited are high. You therefore, need to ensure your documentation is on point and that the information provided is on board to avoid being identified for an audit. Below are some tips that can help you to reduce your chances of an audited:
?1. Use Accounting Software
One of the ways of avoiding scrutiny by the IRS is by using accounting software to manage your accounts. Using accounting software makes you look more professional and accountable than using paper or spreadsheet accounts, as it is much harder to manipulate accounting software. If possible, use accounting software that is recognized and popular.
?2. Claim Ordinary Expenses
One of the things that will definitely raise a red flag is claiming frivolous, unrelated and uncommon expenses. The IRS has statistics and information as to the expenses and the range of expense amount for different businesses and business sizes. Therefore, if your expense claim is too high, you increase the probability of an audit. However, where such expenses are unavoidable, ensure that you have the correct documentation to support the expense.
?3. Mileage
Mileage is another area that the IRS gives more attention to. This is because it is easy to pass off personal mileage as a business expense. High mileage claim may attract the attention of the IRS auditors. Therefore, ensure that you have the support documentation for a lot of travel. Have a mileage log, an appointment book that shows where and why you travelled, and possibly some vehicle repair receipts to support your claim.
?4. Meals and Entertainment
Business meals and entertainment are yet another area that is easy to misuse. The IRS therefore, scrutinizes such expense claims. When you make such claims, ensure that it is not excessive and frivolous. You should also ensure that you claim such expenses according to the IRS rules.
?5. Business Travel
You should also be careful when claiming business travel, especially so when you combine such travel with leisure and holiday. Some destinations such as Las Vegas may attract more attention as such destinations are seen as being more vacation-like places. Therefore, ensure that you have support documentation to show business intent of the travel, such as an invite from a potential client, a trade fare that you are participating, or a business seminar that is related to your type of business.
?6. Home Office
Home office expenses are another red flag as it has times, not a clear division between home and business expenses. To claim home office expenses, you will need to show that you spend extensive time working from your home towards your business. You also need some form of justification as to the way you allot home and business expenses. Some of the support documentation includes a photograph of the work area to show proportion of space occupied by the business.
?7. Use a Professional Accountant
You can also increase your credibility with the IRS by hiring the services of a professional accountant to prepare your account reports according to professional standards.
?8. Consider Changing Business Model
You may also consider changing your business model from a self employment business reporting on the Schedule C to a Limited Liability Company (LLC) or partnership as this attracts less scrutiny and reduces chances of an audit.

Source: http://www.limonwhitaker.com/2012/10/self-employed-%E2%80%93-8-tips-to-avoiding-an-irs-audit/

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