Small Business Owner – Will You Get Audited ?
Essex & Associates:: www.essexinc.biz March 7, 2011
For the fiscal year 2009, 1.4 million taxpayers were selected for either a correspondence or a personal audit.
While there's no magic formula to determine what can trigger an audit and what doesn't, there are some patterns that seem to be pervasive. One pattern that causes alarm among small business owners is the frequency of audits of taxpayers who file a Schedule C.
So, does filing a Schedule C make you an audit target? Well, yes and no.
Statistically, taxpayers who file a Schedule C are two to four times more likely to be audited. This may, however, have to do with the nature of what's on your Schedule C than the actual schedule.
For example, high-income taxpayers tend to be audited more often than low-income taxpayers. Our firm recommend's that taxpayers who are collecting substantial income from a small business consider incorporating in order to avoid filing a Schedule C, which attracts attention.
Additionally, taxpayers who file a Schedule C have more issues with record-keeping. By its nature, the schedule is an information-heavy schedule — there are items of income and deductions.
This opens the door for more mistakes and potential abuse, especially when it comes to generating losses. The IRS estimates that as many of 70% of taxpayers who report net losses on a Schedule C have artificially inflated expenses to create losses.
That said, don't let the tax tail wag the dog. Running a business can be tough enough without adding audit worries into the mix.
Keep excellent records, seek professional help if you need it and above all, if you do get audited, understand that it's not the end of the world, and know your options.
Wishing you many happy returns,
Wayne T. Essex Ph.D.
Essex & Associates
Tax, Accounting, HR, Payroll
7501 Paragon Road
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