Saturday, April 11, 2009

Small Business Audit Triggers Part 1

As April 15th comes closer, and many people have turned to turn some of their hobbies into businesses as a result of losing their jobs, be on the lookout for these nine areas that may cause the IRS to scrutinize your return.

1. Unreported income. Any profession that deals with a lot of cash, such as waiting tables, tends to spark the curiosity of IRS audit agents. One of the first things they compare in cases such as this is bank deposits vs. claimed income.
If you get paid in cash, rather than by check or credit card, it's tempting to just 'forget' to declare some of that income. Make sure you keep accurate records of all cash that is received. The reason is that checks and credit card payments leave a paper trail that can be traced back to the origanal payee. Cash does not leave a paper trail and can easily go unreported.

2. Making more than a million dollars. I know many people wish this was a concern of theirs. If you have an adjusted gross income of more than a million dollars, You'll have the highest chance of getting audited. In 2008, according to the IRS, they audited 5.6% of millionaires' returns, compared with 2.9% of those making more than $200,000, and less than 1% of those making less than $200,000. But, heck, if you can clear a million dollars profit, take the audit. ..

3. Mixing personal and business expenses. It's tempting to write off your new living room furniture or that trip to the Caribbean as a business expense (after all, you read e-mail while sitting on the couch or at the beach, right?) but the IRS certainly frowns upon that. Don't.

4. Entertaining. Another area where personal and business expenses are likely to be construed as intertwined. Also, the IRS doesn't want to see excessively lavish parties (except, it seems, from huge banks getting TARP money, but that's another story). Remember, you can only take 50% of entertaining and food expenses as a deduction. Nevertheless, small businesses need to be out there talking to customers over lunch or dinner, at a ballgame or golfing. Most entrepreneurs don't entertain nearly enough. Do.

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