bake - November 2013 - 12

tax tips

Dodging the Audit
While the odds of getting audited any given year are unlikely for most tax payers, a number of fiscal actions exist that will
quickly raise red flags for auditors. Use the helpful tips below to stop auditors from knocking on your door after you file.

1. Keep Business and Personal Expenses Separate

4. Avoid round numbers

The IRS scrutinizes personal expenses that may have been

A tax return that contains a lot of round numbers - $1,200 in

claimed as a business expense, such as the use of a business

travel expenses or $1,500 in charitable contributions - suggests

vehicle for personal use. However, if you use your car for both

that you're just estimating those claims, "and the IRS loves to

business and personal purposes, you can divide your expenses

go after people who don't keep good records," says Frederick

based on actual mileage. You can then deduct the business

W. Daily, author of five tax-related books. "You don't need to

portion. Maintain separate bank and credit card accounts for

include cents, but use the closest accurate dollar amounts, such

your business and personal use. Be diligent about keeping good

as $1,260 or $1,525."

records.

5. Know your risk
2. Report all taxable income

Document every deduction and keep that proof for at least three

The IRS will receive copies of all 1099s and W-2s your company

years from your filing date. Self-employed workers also tend to

collects. It is critical that your company files all of the required

get a red flag, especially when they claim a business operating

income on the return. If you notice anything incorrect on these

loss "of any size," Daily says. Also on the IRS's radar, those

documents, you will need to have the issuer file a corrected form

whose overall deductions approach 50% of their reported gross

to the IRS. Also, double check all the math on your return. It's no

income. Use this rule of thumb to understand safe deductions:

surprise that sloppy arithmetic will flag an audit. Make sure that

Anything you have to spend money on to make money on is

all sums are not only correct, but also in the correct place.

deductible.

3. Keep meticulous records of cash transactions

6. Remember the easy stuff

Small business owners, especially those in cash-intensive

Don't forget your Social Security number, address and signature.

businesses - think taxis, car washes, bars, hair salons,

"It's a myth that if you fail to sign your return, you will auto-

restaurants, etc. - are a tempting target for IRS auditors.

matically be audited," says Eva Rosenberg, accountant and an

Experience shows that those who receive primarily cash are

"enrolled agent," a person authorized to represent taxpayers

less likely to accurately report all of their taxable income. The

before the IRS. "The IRS will simply send it back for your signa-

IRS has a guide for agents to use when auditing cash-intensive

ture. But if you repeatedly forget to sign and the IRS believes

businesses, telling how to interview owners and noting various

this is a deliberate pattern, you could face fraud penalties and

indicators of unreported income.

unwanted attention on your future returns."

12 < NOV 2013 | bakemag.com

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bake - November 2013

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