Avoiding the Tax Audit: Tips on Keeping the I.R.S. Happy

Dan Blank -- Expert Business Source, 2/24/2007 10:43:00 AM

Jan M. Rosen of The New York Times looks at the reasons the I.R.S. may focus more on the income tax returns of small businesses, and offers some tips to avoid a tax audit:

“…the I.R.S. tended to focus on small-business income because much of it comes from cash transactions that are not reported to the I.R.S.”

The two most crucial items you should focus on:

• Substantiate deductions.
• Report all income.

Since the “burden of proof” falls on the taxpayer, here are some tips they offer to help make sure your taxes meet the expectations of the I.R.S. and reduce your risk for an audit:

• Good record keeping is essential.
  Make note of all expenses, and how they relate to your business. Be careful to separate business from personal expenses. Pay particular attention to travel and entertainment expenses.
• Don’t go it alone.
  If possible, have a certified public accountant prepare your tax forms. If this is cost prohibitive, at least hire one to check over your forms once you complete it yourself.
• Consider using tax software.
  Tax laws change and software can help identify every possible deduction.
• Reduce question marks.
  If you feel something in your return may raise a question, attach a statement explaining it.

AllBusiness.com offers several other tips for preparing your tax return:

• Answere all questions the forms.
• Use exact numbers, not nice round numbers.
• Double-checki your math for errors.
• Prepare your report neatly and accurately.
• Attach explanations for any items that may appear questionable.