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b'With\\xa0Joy Taylor, Tax attorney and Tax Editor at Kiplinger.com
The very idea of an audit by the IRS can make strong men and women quake. As long as you don\\u2019t operate in the crooked lane, being audited is not nearly as scary as one might think, but, even so, it\\u2019s better to avoid waving any red flags
A few months ago, we spoke with Joy Taylor, tax attorney and tax editor at Kiplinger.com, about ways to avoid audits for retirees. This week she\\u2019s bringing her sage advice to address small business owners.
Quelling fears of an audit by the IRS
The likelihood of any individual getting that unwelcome notice from the IRS is .84%, that\\u2019s about one in 119 returns.
Even so, fear of an audit runs especially high with those who are self-employed. Joy explains that\\u2019s partly because small businesses are able to take many deductions that larger businesses cannot, and deductions are something that the IRS keeps its eye on. In 2015, the IRS examined between 2% and 2.5% of small business owners who attached Schedule C; that percentage is 3 times the overall rate for individuals, still not a large number, however.
Know how to play the IRS tax game.
A small business owner earning over $1 million a year has a one in ten chance of an audit. But, if you don\\u2019t make enough money or if you report large losses, your chances also increase. This gets tricky since after about three years of losses, the IRS might view your business as a hobby. The thinking here is that if you are legitimately and seriously running a business, you can deduct losses, however, your activity also must generate profit for three out of every five years to avoid sending out a giant red flag to the IRS.
Does your business sound like you\\u2019re having fun?
Joy warns that the IRS looks at Schedule Cs with large losses especially within certain areas, such as dog breeding, horse breeding, and travel writing. If it sounds like a hobby and looks like a hobby, chances are you\\u2019ll be hearing from them.
Assuming you run a legitimate business for profit, and not necessarily for fun, there are certain valid deductions you can take, with caution. If you work from home, you must use that office space exclusively as your principle place of business. Since more and more people are working from home today, the IRS has actually simplified the process so that instead of having to claim a portion of things, such as phone and electricity, a standard rate of $5 per square foot of space can be claimed, which is a maximum deduction of $1,500.
Another red flag you want to be aware of is claiming 100% of your vehicle for business, since, this is rarely the case. What you should do, however, is keep detailed mileage logs and precise calendar entries to avoid IRS scrutiny.
Joy also reminds us that in the rare circumstance that you are tagged by the IRS for an audit, it most likely will be done by mail, and, if you keep records and your nose clean, you\\u2019ll have nothing to be afraid of.'