Welcome to Part 2 of our 12-part series on how to legally reduce your income tax burden. Here in Part 2, we going to allay fears you may have of being audited by the Internal Revenue Service (IRS).

While failing to plan ahead for taxes (the subject of Part 1 of this series) is probably the No. 1 mistake small business owners make, letting the threat of an IRS audit discourage you from claiming certain deductions or credits is a close second. Here at Stees Walker & Company, we encourage clients to claim every legally allowable deduction and credit. Failure to do so leaves money on the table — our clients’ money — and that’s something we just can’t tolerate. The fact is, your chances of being audited are slim.

However, we encourage you to assume you will be audited. What?

On its surface, that advice may strike you as a contradiction, but it’s really not. Assuming you will be audited simply calls for documenting all income and expenses, so in the event your business is audited, you have the documentation needed to prove your case. In other words, respect the IRS, but don’t fear it. Today’s historically low audit rates make it pay to be aggressive in claiming deductions and credits, but they is no excuse for careless accounting and record-keeping.

Afraid to Raise Red Flags?

As a taxpayer, chances are good that, at some time, you chose not to claim a deduction or did not claim the maximum you’re allowed because you were afraid “it would raise a red flag.” The fact is, audit rates are so low, most legitimate deductions simply aren’t likely to raise any red flags. Audit rates hit an all-time high in 1972 at one for every 44 returns the IRS received. But lately they’ve dropped to historic lows. According to the IRS, for 2019, the overall audit rate was just one in every 220 returns, or 0.45 percent of all returns.

Roughly half of those hinged on one issue — the Earned Income Tax Credit for low-income working families. The rest of the audits focused mainly on returns filed by small businesses — especially sole proprietorships and businesses that have plenty of opportunities to hide income. Examples? Single location restaurants and laundromats. (The IRS publishes a whole series of Continue reading… Continue reading… Continue reading…