How to Avoid an Audit When You're Self-Employed

A professional tax preparer might help you avoid audit triggers.

A professional tax preparer might help you avoid audit triggers.

The threat of a tax audit is enough to strike fear into the heart of even the most honest taxpayer. The good news is most people won't have to deal with one in a given tax year. According to Bloomberg Businessweek, however, self-employed people face audits more frequently than employees. If you have a higher-than-average income and self-employment status, the odds fall even less in your favor. Still, you can take steps to avoid raising questions that make an audit more likely.

Errors

Double-check your math on your tax returns and related forms. Careless errors may imply that you haven't been careful with your return and increase your chances of an audit. Make sure the figures you supply on your tax return match those on any informational documents you receive. For instance, if you receive 1099 forms, use the exact numbers listed on your tax forms. If your numbers do not match, include an explanation with your return.

Common Triggers

Know common audit triggers, and either avoid them or thoroughly document related deductions. According to Legal Zoom, the IRS frequently questions deductions for bad-debt expenses, medical expenses, and expenses for meals, travel and entertainment. Home office and casualty loss deductions often stimulate questions as well. Explain any deductions that could serve as a red flag on your tax return. For example, if you deduct a significantly higher amount in the current year than on past returns, this might raise questions with the Internal Revenue Service. Provide an explanation of the increase on your tax return to head off questions. Additionally, avoid amending your return. The IRS might scrutinize your original tax return more carefully when you file an amendment.

Timing Your Return

File an extension. According to Legal Zoom, most returns are selected for audit before the IRS' final extension date of the year. Usually, this falls in mid-October, but check the IRS website for current details. However, pay the amount you think you owe by the normal tax return deadline. Paying later can translate into fees and penalties.

Potentially Helpful Changes

Incorporate your business, form a limited liability company or enter a partnership. Filing a Schedule C, a standard tax schedule required for sole proprietors, might raise your chances of getting audited. Keep scrupulous financial records. Sometimes audits are unavoidable, and you'll need proof to back up your returns. This can include bookkeeping ledgers, receipts and canceled checks. According to MSN Money, most taxpayers need to keep tax returns and related records for about three years after filing or the due date of the return. You can usually go by whichever date is the latest.

Professional Help

According to Fox Business, you can reduce your chances of an audit by seeking professional help with your returns and records. The IRS might be less likely to audit a professionally prepared return than one you prepare yourself. The idea is that a professional usually knows what he's doing while a self-employed filer might be more likely to misinterpret laws and make mistakes. Likewise, having your financial statements professionally prepared might ensure accuracy and prove your claims in an audit.

About the Author

Jordan Meyers has been a writer for 13 years, specializing in businesses, educational and health topics. Meyers holds a Bachelor of Science in biology from the University of Maryland and once survived writing 500 health product descriptions in just 24 hours.

Photo Credits

  • Creatas/Creatas/Getty Images