Tax Advice from a Former IRS Auditor

Small businesses face a relatively higher risk of audits than individuals. Here are some pitfalls to avoid to make sure your returns are accurate. Everyone wants to maximize their tax deductions and reduce what they owe the government. But remember: If you report income as a small business owner, you face a higher risk of getting audited than individuals with just payroll or investment income. That's because it's much easier for small business owners to understate their income or overstate their write-offs than it is for individual employees, who have their wages reported by their employer. Indeed, the IRS devotes the greatest share of its enforcement budget—41 percent in 2006—toward small businesses. The agency in recent years has tried to increase compliance through education and enforcement. The Schedule C, which sole proprietors use to report income, is the single most audited business form, says Jeff Collins, a tax attorney and former IRS auditor in Schaumburg, Ill. Small business owners can save themselves grief by avoiding common tax slip-ups. One big trap some fall into: failing to pay payroll taxes. These contributions, which include the employer's half of Social Security and Medicare taxes, are due monthly, but business owners with cash-flow problems sometimes fail to pay them because they need to cover other fixed costs like wages and rent first, says Collins. Companies can avoid that temptation by hiring a payroll service to make the tax contributions along with each payday. Read the rest of the BusinessWeek article