How to Avoid a Small Business Audit By The IRS, by Brendon Pack

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During tax season and throughout the year, IRS agents carefully review every tax return that comes across their desks. However, agents take a second glance if they catch something on a return that seems abnormal. This may result in an IRS auditduring which the IRS contacts a taxpayer to clarify certain information.

The IRS audit process varies based on the extent of the information needed, and an audit can be for an individual taxpayer or a business. Taxpayers typically receive an audit notice in the mail to begin the process. Or, an auditor may visit your business in person to examine certain financial records. It can take several months – or even a few years – to fully resolve an audit.

If you’re wondering how to avoid an IRS business audit, use these tips:

1. Adopt a formal entity structure for your business.

If you work as a sole proprietor, the IRS will likely give your tax return some extra attention automatically. So, why not set up a formal LLC or corporate entity? Doing so can give your enterprise more credibility, allowing you to claim deductions and other tax-saving measures without fear that your activities will be examined more closely. Simply registering a formal entity for your venture can help reduce your risk of a small business tax audit.

2. Always file a completed business income tax return.

There are many taxes for small business owners to be aware of and ultimately cover on their IRS returns. After your income tax return has been completely filled out from top to bottom, review it with a keen eye. Be sure that every line that is applicable to your business tax situation is filled out completely and correctly. If you send an incomplete tax return to Uncle Sam, the IRS may question why you failed to disclose certain information on your return. This could trigger an audit.

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