When auditing small business owners, the IRS will look to see if you have done any of the following:
1. Under-reported Income:
Unlike a typical employee whose taxes are withheld from his/her wages/paycheck, you are a business owner with no withholding. You may be tempted to underreport how much you earn in order to pay less taxes – particularly if you run a cash business. Resist the temptation!. The IRS is trained to probe for unreported income – particularly when gross receipts appear below average for your type business or when gross receipts are not in line with reported expenses.
2. Illegitimate Tax Deductions Claimed:
Don’t claim that your trip to Orlando was a legitimate business expense –when in fact it was a family vacation to Disney World. There are plenty of legitimate deductions you are entitled to! When you claim an obvious family vacation as a business expense, it causes the IRS to suspect all of your business deductions are personal.
3. Improperly Documented Deductions:
Poor record keeping is the primary reason small business owners lose deductions when audited. Without proper documentation (canceled check, receipt, etc.), the IRS may reduce the amount you claimed – either in part or entirely!
Bonus Tip: Poor record keeping costs you money as your accountant will surely bill you for the hours he spent sorting through your messy records
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