Small Business Taxes - 5 Mistakes That Could Mean an IRS Audit

Small Business Taxes - 5 Mistakes That Could Mean an IRS Audit

During tax season you're probably rushing around to get your returns filed on time. You want to pay the least amount of tax legally possible and most likely you also want to avoid an IRS audit.

Here are some mistakes that could dramatically increase your chances of IRS Audit:

(1) Failure to report Form 1099 income.

We've got a new wrinkle this year with as many as 1 million Form 1099-A and Form 1099-C sent out for foreclosure, deed-in-lieu of foreclosure and short sales. The IRS isn't even giving consistent information on when you need to report them and when it's taxable and when it is not. But you can count on the fact that if you do it wrong, you'll get an audit.

(2) Not Reporting Officer Salary on an S Corporation.

The IRS recently learned that 68% of all S Corporation returns are done wrong! That's the new audit focus for the next few years. One of the issues is officer salaries. In fact, they found that there were over 1 million S Corporations with profit and sole shareholders who had no reported officer salary. Oops. Look for an audit here.

(3) Not reporting inventory.

If you have a retail business, you need to report an inventory. Otherwise, the IRS is going to assume that you are incorrectly reporting all purchases as current expenses. It gets tricky with virtual products. You should definitely consult a bookkeeper and/or accountant.

(4) Not reporting medical insurance expense properly with an S Corporation.

This was actually #1 on the IRS new hit list for audits. The rules are confusing for S Corporation shareholders and medical insurance and medical expenses. I think the IRS may be counting on you getting it wrong. Because if you don't report it right, you won't get the deduction. If you have 2% or more of an S Corporation, then make sure you get it right!

(5) Not making the right decisions on your first tax return.

I had someone ask me which software was best to use for his home-prepared LLC return. The question itself told me the answer - none of them! The LLC doesn't have a tax return, you either elect how it is taxed or there is default tax. The fact that he was trying to find an LLC return told me that he needed help. The problem is that the first business return is the most critical one you'll ever file for your business. Without even knowing it, you will make elections that could come back to haunt you years later.

Those mistakes are very commonly made by small businesses, and because the federal government and state government throughout the U.S. are currently in a bind when it comes to collecting enough taxes, the IRS will be cracking down harder on small businesses as well as individuals.

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