According to the National Association for the Self Employed (NASE), nearly 17 percent of the 145 million tax returns filed in 2010 were from self-employed Schedule C filers. Of these roughly 24 million self-employed businesses, many thousands were subject to an IRS audit. In order to be prepared for an audit, you as a business owner must meet your tax obligations fully, and keep detailed records proving that you have done so. If you do, the audit process need not be feared. During an audit, the IRS can (and often does) examine up to three years’ worth of tax returns and other records, so make sure your current tax return includes all the necessary paperwork and documentation. Doing so can help you avoid an audit, and survive one unscathed should it occur.
For many self-employed businesses, small business accounting software is the ideal solution. There are various software solutions to choose from, with a wide range of functional capabilities and interface styles. Some are simple and intuitive, others are more complex and more powerful. The right software can guide you through small business tax preparation and help you manage all your small business finances so that you will be protected in the event of an audit. According to NASE National Tax Advisor Keith Hall, business owners can breeze through an audit if they have all of their financial information in order. “As long as taxpayers dot their I’s and cross their T’s when preparing their return, then there is no reason to worry about an audit,” he says. “It’s possible that you might even get a refund.”
Small business tax preparation is a complicated process, but it’s nothing compared to the audit selection process. If you want to stay out of the IRS’s spotlight (and trust me, you do), here are some helpful hints to keep in mind. First, check your math. Erroneous math is the number one reason for an audit, so make sure all your numbers add up, your dates are correct, and your Social Security numbers and other tax identification numbers are entered correctly on your return. Using small business accounting software can practically eliminate these errors, so find one that works for you and stick with it.
Prior audits might increase the likelihood of your being audited again, especially id you have matching tax indicators (for example, if you’re operating the same business and take the same typical deductions). If last year’s audit included an additional tax assessment, you should prepare for the likelihood of another audit this year. Most of the returns selected for an audit can chalk it up to statistical sampling, so don’t worry too much if you are audited. Chances are, you were selected simply because you had a more complicated tax return than someone else. Just make sure you have all of your financial information organized and at hand, and your audit will be a painless (if not quite pleasant) experience.
