Nine easy ways to reduce your chance of being audited - Continued

6. If you work from home, try not to show more expenses than income.
This would be another tip-off that you might have fallen for one of those work-at-home scams. Or that you were not serious enough about being in business to make a profit. If you don’t show a profit in three of the last five years, the IRS might determine your so-called business was just a hobby and disallow the business deductions you’d taken.

7. Don’t show so little net income that it appears you have nothing to live on.
The IRS knows you must meet your living expenses somehow, so if your total family income looks too low to do this, the IRS may ask you how you survive -- especially if you show miniscule income for several consecutive years.

If your spouse is working, that salary will be listed on your tax return, showing clearly there’s some income coming in to offset low-income years you report for your business. Or if there’s something in your return that indicates you have a pile of money around you can draw from -- shown by significant interest or dividend income, or a recently sold property -- then the “how do you survive” question is less likely to come up.

8. Don’t try to call your employees independent contractors
If you control how someone works, they are your employee, not an independent contractor. You must withhold tax from their checks, pay various employer taxes and send these monies on schedule to the IRS. If your “independent contractors” are later deemed to be employees, you’ll face huge back taxes and penalties, which could literally break your business.

This is one of the hot problem areas in small businesses, so the IRS and various state agencies are on the lookout for indications of violation. If the type of product or service your company provides requires even a small number of people to regularly work on your site in coordination with each other, these people most likely must be classified as employees.

We’ve just briefly generalized the employee situation, but if this sounds like it might pertain to you, it is imperative that you educate yourself in detail about the letter of the law. Ignorance is not accepted as a viable excuse for non-compliance. So read up starting with this page on the IRS site which provides many examples and points to even more information:

Independent Contractors vs. Employees

9. Report all your income
This should go without saying, but many people think they can get away with not reporting all the income they receive. Hello, this is the 21st Century! The IRS has very sophisticated technology that compares the income total you report to information they receive from other sources. Plus they use computer analysis and statistical studies to spot irregularities.

Sorry, no guarantee

There’s no way anyone can guarantee you can avoid an audit. The IRS sometimes audits everyone within a certain geographic area who’s in a particular field -- such as all babysitters or all auto dealers -- in order to develop statistical data on that industry. So you never know when your number could come up.

But generally, if you don’t make silly errors or try to take deductions that defy logic, you’ll greatly reduce the likelihood of being audited. And you won’t wipe out your tax savings with back taxes and penalties.

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