Of the 230 million plus tax returns expected to be filed each year, about 16 million returns result in audits for small businesses and sole proprietorships.
The root cause is often times traced to improper reporting of profits and losses on Form 1040. Incorrect reporting may be intentional or an honest mistake. Regardless, the IRS is still obligated to follow up on any suspicious reporting.
Determining what counts as an expense and what does not can get tricky and the calculations can get even trickier. In order to avoid audits it is highly recommended that those who struggle with bookkeeping, or do not have time to keep track of expenses and income, hire a professional to do so. An accountant or bookkeeper is less likely to overlook expenses or make calculation errors.
Reviewing the numbers and making sure everything was entered and accounted for correctly before filing is always important, regardless of whether or not you hired a professional, as the one held accountable for any mistakes is the business owner.
Improper reporting of deductibles and losses is a huge red flag for the IRS. If you do claim deductions or losses, make sure that you do so correctly and honestly and that you have the documentation to support all expenses.
Those with higher incomes are also more likely to be audited. Statistics for 2013 showed that those with incomes of $200,000 or higher had an audit rate of 3.26 percent.
The electronic filing options are great tools to use in order to reduce the risk of an audit. Visit the IRS Electronic Filing Options to file and to see which forms other forms you can file electronically.
Avoid waiting until the last minute to file your return. If you hired a bookkeeper, making sure they have received all necessary information in a timely manner is crucial for on-time filing.
Dealing with the IRS is not always pleasant but keep in mind that avoiding and lying to the IRS can result in a more complicated situation. If you are already dealing with an audit, honesty can go a long way. Explain your situation to the IRS agent and ask about your options. The IRS has already set up payment plans for those who are willing to pay but cannot afford to pay large sums at once.
