If you are self-employed, the IRS has already targeted you as an audit candidate. This is because it believes that the self-employed are more prone to cheat on your taxes. With cash payments and the lack of W-2’s, it is easier to file false tax returns. The IRS actually employs the most staff in its Small Business/Self-Employed Division. So even if you have paid all your taxes on time and run an honest business, you have a high chance of being audited. This, in turn, means that you have IRS Problems without even knowing it.

If you receive notice of an audit, the IRS will want information regarding:

1. If all your business’s sales and receipts were reported

2. If you write off personal living expenses as business or home office expenses

3. If your lifestyle exceeds the amount of self-employment income you reported

4. If you have written off car expenses for travel expenses that were not business related

5. If you claimed large business entertainment expenses

6. If you reported all cash transactions

7. If you paid proper payroll tax deposits

8. If you have workers who have been classified as independent contractors when they are really employees

As you can see, it is very important to keep good records. When and if an audit happens, you will have the necessary documentation the IRS requests.

The following tips should lower your risk of an audit:

1. Do not make math errors. If you have multiple math errors on your tax return, the IRS may want to check you out.

2. Do not forget to sign your tax return. If you forget to do this, what else have you forgotten to do?

3. Do not overestimate your donations. Use the fair market value for any donations and if you have donated a big ticket item, get a letter from an appraiser for your records.

4. Do not underreport your income. Remember that the IRS can investigate your accounts.

5. Do not hide cash transactions. Cash transactions over $10,000 must be reported on IRS Form 8300 by the 15th day after the date of the transaction.

6. Do not overestimate your home office deductions. If the room your home office is housed in is used solely for that purpose you can deduct the expense. Keep good records on the portion of the utilities and insurance needed to keep that room functioning as a home office.

7. Do not neglect to make your payroll tax payments. The IRS considers you as illegally borrowing money from the US Government if these taxes are not paid.

8. Do not have income discrepancies. This means your income should fit your lifestyle.

Other factors that might give the IRS a reason to audit your business include a change in your lifestyle, an increase in your income, a partnership, a trust, or tax shelter investments, hiring family members, and hiring employees vs. hiring independent contractors.

If you keep accurate, organized records and pay your taxes on time, you will be able to convince the IRS that you run an honest business if you are audited. Make sure you hold on to your records for three years as the IRS can audit you for three years after you file a return.