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Thursday, April 30, 2009

How Small Businesses Can Avoid a Tax Audit

WSJ Blog

By Kelly Spors

irsThe message for you: The tax auditor might want to take a look at your books. So how can you avoid that?

… We spoke with Bill Fleming, managing director of PricewaterhouseCoopers office in Hartford, Conn., to get some ways businesses might lessen their chance of an audit.

Here are some possible ways he recommends:

- Keep personal and business expenses apart. … Mr. Fleming recommends being extra diligent about keeping business and personal expenses separate, holding separate business and personal credit cards and bank accounts so you have clearer documentation and lessen the chance you’ll inadvertently mix expenses in your tax reporting. And if you are audited, you better have your story straight: “Make sure that business auto looks like it’s used for business. Fill it with stuff, plaster advertisements on it,” Mr. Fleming says.

- Avoid “miscellaneous” expenses. … “Don’t have $2,000 or $3,000 of ‘other stuff,’” Mr. Fleming says.

- Keep organized records and receipts. … Messy records look like somebody’s trying to hide something or may have forgotten to document that one big payment. …

- Hire a trusty accountant. … A seasoned tax preparer can not only advise you on what tax breaks are available, but should have enough experience with audits to help you minimize your risk.

- Avoid the home-office deduction. … [For] many, the tax break is meager compared to the potential headaches it can cause.

- File an extension. People used to believe that filing for an extension increased the risk of audit. But some studies have shown that filing for an extension actually reduces the audit risk at least slightly, Mr. Fleming says. …“If you don’t mind delaying filing your return, it might help,” he adds.

Other tips on preventing tax audits can be found here, here and here.