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When Avoiding a Tax Audit; the Best Offense is a Good Defense

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When Avoiding a Tax Audit; the Best Offense is a Good Defense

By ChristineL
Published: August 26, 2010 Updated: February 10, 2011

An IRS audit is an impartial review of your tax return to determine its accuracy, not an accusation of wrongdoing. As a taxpayer, you have the burden of proving that your return is accurate. That said, an audit can be a time-consuming and frustrating process if you don't have your bookkeeping in order. In terms of avoiding a tax audit, the best offense is a good defense.

Document All Income and Deductions.
You can verify income, profits and earnings with supporting documentation. To document employee wages, especially when your spouse or relatives working for your company, include a record of their hours, activities, and pay. Read more about business bookkeeping on Business.gov.

Large tax deductions are audit red flags, so make sure all are well-documented. If you think that there is anything on your tax return that may give a reason for the IRS to look twice, attach a copy of the invoice or paid bill in question. For example, if your charitable contributions are greater than $500, request written word for proof from the charity to which you donated.

Claim Only Entitled Deductions. Verify which deductions are applicable to you, and the amount you qualify for. Say you qualify for a home-based business deduction - you may only be entitled to a percentage of that deduction. You can write off business losses, but make sure that you are in fact legally considered a business.

Check and Double-check Your Math. While this is true for all taxpayers, accurate accounting is especially important for small business owners who want to avoid a tax audit. If you prepare your own taxes, you may consider hiring a small business accountant to review your work.

Use Your Common Sense. Use the IRS Small Business and Self-Employed Tax Center to locate the right forms. Answer all the questions on your tax return. File your taxes on time. The less mistakes you make, the less likely you are to hear from an auditor.

Best Practices
Keep good records of your business activities: locations, times and dates, expenses, a description of what took place, along with accompanying receipts and cancelled checks. This way, if you happen to be audited, you have already done your due diligence by documenting your business practices throughout the year.

Have more small business tax questions? Ask your tax questions in the Community.

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Comments:

On the last point especially, here in teh UK they are investing in extra resources for small businesses to be able to keep good records. As a contractor over here i use the tool kits our government provide and i have never run into any trouble...im guessing you have something similar in the UK? i'm currently considering using an Umbrella Company to help me setup my own company and look after my accounts. ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
As a new small business owner this site is perfect for what I need. Thanks for the good info on tax prep, audit, etc. Dr. Bates Camarillo Chiropractor

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