Tips for avoiding a tax audit
While the risk of being audited is still relatively low, no one likes to go through an audit. You can further decrease your chances of having to deal with the IRS by taking some additional steps before filing your return. Here are seven tips to help you avoid an audit.
1. Double-check all of your documents.
Simple errors raise red flags for the IRS. For example, if you get a Form 1099, make sure the numbers you enter on your return match the numbers on the 1099 exactly. Forms like 1099s are also sent to the IRS, and if they do not match up perfectly, that can trigger a closer look at your return.
Math mistakes or other errors can cause concern, too. Using reliable software can help you avoid some of these common red flags.
2. Avoid reporting a loss.
While you should take advantage of all legitimate business expenses, reporting losses year after year can attract IRS attention. You are more likely to be audited if you report losses in multiple consecutive years.
The IRS wants to be sure that the losses from your small business are the result of actual business functions rather than an attempt to offset other income. If losses are consistent, the IRS may classify your business as a hobby rather than a for-profit enterprise.
3. Keep shareholder salaries reasonable.
If your business provides salaries to shareholders, they must be reasonable. Paying executives high salaries might help you avoid being taxed at the corporate level, but excessive compensation can raise flags.
Research what a reasonable salary for your industry and position looks like and use that as a baseline. Sticking to fair wages for the work performed makes it less likely the IRS will question your return.
4. Classify independent contractors and employees correctly.
If you have many independent contractors compared to employees, that could concern the IRS. Some small business owners mistakenly classify workers as independent contractors to avoid payroll taxes and benefits. Review IRS guidance on worker classification so you do not inadvertently misclassify your team. Proper classification helps you avoid potential audits and penalties.
5. File on time.
Filing late increases your small business's likelihood of an audit. When you file late, your return may be reviewed separately, giving the IRS more time to look for potential issues. Filing early or on time also helps you avoid interest and late fees on any amount owed.
6. Avoid reporting estimated or rounded numbers.
Rounded numbers, such as $500 instead of $523, can look suspicious to the IRS. It may suggest that you are estimating instead of reporting from accurate records. Always use exact figures from your receipts and records—for example, if you spent $13 on ink, report $13, not $10 or $15.
7. Report deductions accurately.
The IRS pays special attention to certain deductions because they are often misused. Be sure you understand the rules for each one.
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Home office deduction: You can deduct expenses for the business use of your home, but the amount must be consistent with your type of business and the size of your workspace.
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Meals and travel: Generally, only 50% of business-related meal expenses are deductible. Keep detailed records of dates, amounts, and business purposes.
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Charitable donations: While charitable giving is commendable, unusually large donations for your business size or income may trigger additional scrutiny.
For the most current deduction limits and guidance, check IRS Business Expenses.
Keeping your business audit-ready
There's no better time to check and re-check your tax return, especially in light of the IRS's increased scrutiny over small business filings. If you have any legal questions about your particular tax situation, reach out to a Legal Pro for fast and affordable legal advice.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
