I love the entrepreneurial spirit that many small business owners have and have dedicated my life to helping them solve their tax, legal, and business problems. Why they require my help is that many of them, as great as they are at whatever they do, fail to keep their house in order when it comes to their internal affairs. They do not keep their receipts, do not pay themselves a reasonable salary, fail to maintain accurate records, guess on expense categories, and generally make lots of other mistakes. I love my clients, have come to accept this about them, and work hard to keep their house in order. Unfortunately, there is usually a lot of upkeep associated with a small business and many people fail to keep it together. This is no secret among attorneys and tax practitioners, and, unfortunately no secret from the IRS. Unlike a straight W2 employee, small business tax returns are much more complicated and leave a lot of room for error. This error often translates into tax loss for the IRS and, therefore, makes small business owner tax returns a frequent target of IRS review. Statistically, they are just more likely to get popped.
The moral here comes back to one of my favorite borrowed sayings that “an ounce of prevention is worth a pound of cure.” If you own a small business then it really does pay to keep good and accurate records and translate those records into accurate financial statements and tax returns. I know there are a million things to worry about with your small business. Emergencies and minor crisis pop up every day and some people simply have too much on their plate to worry about record keeping. However, by keeping up with these things or by outsourcing them to someone else, you will save yourself the day that the IRS comes knocking at your door. If I live in Seattle and it is more likely to rain there, I will probably buy an umbrella. If I move to Northern Minnesota, I will probably invest in a good winter coat. Similarly, if I am in the profile of people that may have one of the highest margins of error on their tax returns and are statistically more likely to get audited, it would probably be a good idea to take out some audit insurance in the form of good recordkeeping should that day ever come. I am not saying it will, I am saying just in case.
In conclusion, no one can be 100% certain of what their audit risk is or can fully audit proof their tax return, but prudence is the best way to safeguard yourself. Be mindful of where the dangers are, keep honest and accurate records (especially for major events), and if the IRS does ever come around, you can rest easy and know that you really have nothing to worry about.