Having by-passed the notorious due date for 2007 individual and some business income tax returns, today we discuss the dreaded subject of income taxes for businesses.

IRS Increased Business Audits

The IRS increased their audits of individual tax returns in 2007 by about seven percent, audits of small corporation returns by just over 10% while drastically increasing audits of “flow-through entities”. Flow-through entities are Partnerships and Limited Liability Companies (IRS audits increased by 25%) and S Corporations (IRS audits increased by 26%) that flow through their income to the owners. The IRS contends that these self employed workers are some of the biggest non-compliers in the tax system.

No one knows that exact triggers the IRS uses for choosing which returns get audited but wide variations in expenses, losses and unusual items certainly gain attention. Business owners make their audit trails much cleaner by following some simple, smart rules.

Separate Bank and Credit Card Accounts

Separate bank and credit card accounts – You business needs separate bank and credit card accounts. Flowing income and expenses through your personal accounts, even occasionally, leaves the argument open that your personal and business assets are comingled. Don’t use business credit cards for personal expenses and don’t use personal credit cards for business.

Comingling shouts an alarm that you are a sloppy record keeper and may be expensing personal items. Worse yet, in the event of liability issues, your personal assets may suddenly be considered part of the business.

Avoid Red Flags

Entertaining and home-office expenses raise red flags, especially if they appear high. Make sure dinner with the wife or movies with the kids don’t show up as an expense on your business return. Accountants say that consecutive loses and income reported by 3rd parties that doesn’t match your reports raise flags. The amount of deductions claimed in relationship to income also raises flags. The IRS also reportedly matches the income and expenses you report with other same industry reporters in your geographic area.

If you prepare your own return, check and double check your math. Manually prepared returns contain the highest number of math errors. Also make sure you keep up with the changes in the constantly changing tax code. An accountant or good tax preparation software saves these costly errors that slow down your return and also may raise audit flags.

Organized Records

The biggest favor you do for yourself is to attach documentation to your copy of your return. What better time to organize these records since you already have them out for preparation of your return. If you are audited, you saved hours of searching and pulling records to document your return. You know exactly on what you based your calculations; a life saver when you must explain your return 3 or 4 years later.