Smart Tax Strategies for Audit-Proofing Your Small Business

Going through an audit can be nerve-wracking and time-consuming. Most business owners would rather pull their own teeth out than deal with the IRS. Here’s how to survive the ordeal and avoid future audits in the future.

Small business tax woes

Outsource Your Accounting and Tax Work

If you want to avoid a lot of trouble with the IRS, pay someone else to deal with them for you. Outsourcing your tax and accounting work is one of the best moves a small business can make. Too many businesses mistakenly believe that they must do everything themselves.

In some ways, their entrepreneurial spirit “forces” them to “take on the world.” In reality, they’re setting themselves up for a legal nightmare.

Stick to your core competencies. If you’re a baker, bake. If you’re a welder, weld. If you’re a handyman, do handy things. Don’t try to be a tax professional.

Cheap services like TurboTax won’t really go to bat for you if you get yourself into trouble. A qualified CPA or tax attorney will. You could also look into hiring an IRS enrolled agent. They don’t work for the IRS, but many of them are former IRS agents who now do tax accounting and filing.

They’re consumer advocates as well as independent tax consultants. They’re probably your best option.

Hire a Good Lawyer

A good lawyer can be worth his weight in gold. According to the Accounting Firm at, businesses have a lot of opportunities to save money on their taxes. But, most businesses don’t take full advantage of the tax code.

At the same time, many business owners take crazy risks by overestimating their deductions and underestimating their income.

By retaining a law firm that can do both taxes and legal representation in front of the IRS, you shift the burden to a specialist so you can focus on your core competency.

Don’t Overestimate Donations, Travel, Or Entertainment Expenses

A big mistake many businesses make is overestimating charitable donations, travel expenses, and entertainment expenses. The IRS sees these as targets, and will scrutinize them for accuracy. A lot of audits start out because the IRS auditor doesn’t believe a company’s travel or entertainment expenses. So, make sure you’re keeping accurate records.

Higher Incomes Are Targets For Audits

The more you make, the more they take. That’s the saying, right? With the IRS, the more you make, the more they watch you.

It’s sad, but true. The IRS’ job is to collect revenue. They have to apply a little logic to this equation. If you make $50,000 a year as an independent contractor, you’re not contributing much in the way of tax dollars compared to a $1 million company.

An error on $50,000, might result in a few extra hundred dollars. Perhaps it would bring in a few thousand. But, the amount of work involved (man hours) would make it a losing proposition for the agency.

On the other hand, a mistake on a $1 million income taxpayer could bring in hundreds of thousands of dollars. That’s well worth the effort. So, if you’re a higher income business, it’s especially important that you have someone else do your taxes.

Watch The Home Office Deduction

Home office deductions are suspect because so many business owners don’t actually have a room dedicated to their business. And, many businesses are looking for ways to deduct part of their house and related expenses.

The home office is the perfect cover as far as the IRS is concerned. If you have a home office, make sure it’s the primary office for your business and that you do most of your work there. Also, make sure the space is clearly delineated and that it’s not used for anything else.

Accurately Report Employees and Independent Contractors

The IRS has pretty strict rules for who constitutes an independent contractor and who is an employee. Basically, an employee is beholden to you. If you can direct the employee’s activities, set his schedule, and dictate how the project or work is to be completed, he is an employee.

Writing him down as an independent contractor is going to draw fire from the IRS. It’ might also get your independent contractor reclassified as an employee. From there, you get to pay penalties and tax on taxes the IRS thinks you should have paid from the beginning.

You also have to content with the fact that the IRS might put you into the crosshairs of other government agencies as well.

For example, employees have the right to unemployment benefits if they are involuntarily terminated (unless it was misconduct). You must pay unemployment insurance premiums for them. You must also have worker’s compensation.

So, mischaracterizing an employee will get you into all kinds of hot water.

Solution: make a choice. Do you want independents or employees? If you want the former, treat them as such and follow the guidelines to the “T”.


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