Tips to Avoid IRS Business Audits 

As a small business owner you can avoid potential issues with the IRS if you file your tax returns without errors. The fact is, even one small error on your business tax return can set off a domino effect. If the IRS finds one mistake they will continue on to scrutinize the rest of your documentation. This could lead to being audited by the IRS – a costly situation in terms of time and stress for you as the owner of the business. Not only that, but once your business has been audited the first time you become a red flag forevermore in the eyes of the IRS.

The first thing to do when filing your small business tax return is stay with the “status quo.” Use the standard formulas for calculating profit and loss within your industry. Obvious deviations will draw attention to your return. Dramatically shifting gears in the way you have filed past returns will become questionable as well. Stick to the systems that work and have already been accepted.

Fill out the Alternative Minimum Tax form (#6251) whether or not you think you qualify. It will be troublesome for you if you have not done this and later find out you owe. 

Make sure that the numbers you claim you paid out to vendors and employees agree with their claims. Using 1099, K-1 or W-2 forms will ensure you have done this correctly. 

If you are operating as an S corporation you must correctly report your salary as the owner.  There has been an attraction for business owners to take part of their earnings in the form of distributions because these are not subject to payroll taxes, but the IRS is keenly aware of this and are encouraged to do an audit on your business if they are suspicious.

Section 179 of the Internal Revenue Code provides the rules for depreciation of assets. Read it thoroughly before trying to grab that tax savings, lest you make a mistake.

Be completely honest in all you are claiming. Don’t try to doctor anything you present in your return for the sake of trying to save money here or there along the way. In the long run it will cost you big. There are multiple and various forms of penalties for noncompliance with the IRS. Tax evasion can potentially draw criminal charges and jail time. If you do happen to be chosen for an audit, the IRS website provides a guide to handling the situation correctly, called Audit Technique Guides. As an aside, if you are planning to apply for business financing this year, your tax returns must be filed correctly and up to date.