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Five Tax-Time Audit Red Flags For Small Business

Posted by: Colleen Debaise on March 27, 2009

Ahead of the IRS issuing its annual “Dirty Dozen” list of the most egregious tax schemes and scams (here’s the 2008 list), accounting firm BDO Seidman has kindly prepared a primer for small business owners on audit red flags.

Small business owners are about three times more likely to be audited, all the more reason to doublecheck returns and keep good records, according to BDO. The firm says to keep the following in mind:

—If your business was hurt by the recession in 2008, be aware that a major change in revenue can trigger a review of your return. So if you suffered a loss last year, you may have to prove that your business is legit and its goal is to make a profit.

—Are you filing a Schedule C, Profit or Loss from Business? The IRS is always on the look-out for sole proprietors who downplay earnings or overstate expenses. Take whatever precautions necessary to make sure you have proper documentation.

—If you’re recently started working from home to save money, you can’t claim a home-office deduction unless you’ve dedicated space exclusively for business. Because of the gray area of this deduction, claiming it will “very likely” raise a red flag, BDO says. Read our story on how a home business can avoid a tax audit.

—Take all the deductions you’re entitled to (here’s a partial list) but keep in mind that the No. 1 trigger for small business audits is claiming false business expenses.

—Pay special attention to business travel and entertainment deductions, as extravagant write-offs can trigger a review. Remember, many of these expenses are only 50% deductible, BDO says.

For more info on what can trip you up in an audit, see our slide show here.

Reader Comments

G Sutton

March 27, 2009 3:41 PM

Good info.

Mike Habib

May 31, 2010 12:43 PM

What are the chances of being examined? A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year). Article.

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