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

Report your information accurately on your taxes.

Self-employment sends up a red flag for the IRS because of the ability to falsify information provided on taxes. Unlike a traditional job where the employer provides the earning information, a self-employed individual reports his own income, losses and business expenses. While your self-employed status gives you a higher risk of an audit, there are steps to take to lower your chances. Accuracy and records are essential in case you do get the audit call.

Instructions

1. Start a separate bank account for your business if you don't have one already. Keep all finances for the business separate from your personal money and spending.

2. Register your business and follow other local and state requirements to ensure you operate legitimately. This lets the IRS know you are running a serious, legitimate business.

3. Report all sources of income for your business. Track your income accurately throughout the year so that you are able to report it accurately. Never hide income from the IRS.

4. Deduct only actual expenses you are qualified to take. Take deductions for things you actually paid for. If taking a deduction for business use of your home, deduct only the amount of space that is actually dedicated to the business.

5. Use a tax professional to calculate and file your business taxes, especially if your business makes large amounts of money. The tax professional is less likely to incorrectly calculate the taxes. You are also less likely to take deductions you don't qualify for with a tax professional.

6. Keep all records and documentations to support business income and expenses.

References

• Nolo Law for All; Why the Self-Employed Are Audit Targets; Frederick W. Daily
• CNN Money; Tax Audits: Uncle Sam Wants You!; Blake Ellis; February 2010