Tips for the Self Employed in Avoiding an IRS Audit
Alan L. Olsen, CPA, MBA (tax)
Greenstein, Rogoff, Olsen & Co., LLP
If you are self-employed, the chance that you have of being
selected for an IRS audit will be closer to your ballpark. The IRS looks for red
flags that when processing tax returns, targeting individuals to potentially
audit. Self-employment is a flag in itself as the IRS wants to ensure that
those who are self-employed are not trying to dodge tax laws through small business
deductions. Tax preparers should be careful about preparing returns that show
deductions that do not fit the category of “ordinary and necessary” business
expenses to minimize the chances of a potential audit.
Here are a few tips to consider:
1. Home Office Deductions
Taking a deduction for a home office may increase your
chance of an IRS audit, but if the deduction is worth it go ahead and take it.
If the deduction is minimal in tax savings, you may want to reconsider whether
taking the deduction is worth targeting you for an audit.
2. Is it really a business deduction?
Before you buy that big screen TV, consider “Will it really
serve it’s purpose as a business expense?” It is important that the expenses
that you are claiming as business deductions are honest business deductions.
3. Hiring family members
As one who is self employed, you may be inclined to hire family
members so that you can get more profit out of your business. This is fine as
long as the family members are actually working.
4. Entertainment Deductions
If you are using business expenses to pay for
entertainment, make sure that you are discussing business on the outing. It can
be easy to slip into the habit of using your business card to pay for a meal or
two that should come out of personal expenses, so be careful.
Red flags are not a guarantee that you will be audited, but
they do increase your chances of one. Don’t hesitate to claim the deductions
that you rightfully deserve. Just make sure that you can back them up with
proper documentation if it is necessary. Remember though, that honesty is
the best approach to avoiding an IRS audit.