The Entrepreneur’s Guide to Avoiding a Tax Audit

by Silicon Valley Blogger on 2008-06-0115

Though self-employment has a lot of pluses, one of the downsides to being your own boss is that the IRS keeps a closer eye on your business. This isn’t inherently bad, of course. Whether you believe it or not, the IRS really isn’t a wicked cabal that waits in the dark, poised to pounce on you whenever you make a mistake. They merely want you to be honest and pay those taxes.

Still, the idea of being audited sends shivers up many a spine. Remember when the action star Wesley Snipes was sentenced to several years in prison? You may envy his physique, or his fame, or even his money, but you certainly won’t envy his tax-related problems [he did make bail after receiving a three year prison sentence, the maximum penalty for failing to pay taxes]!

wesley snipes tax fraud

Actor Wesley Snipes, who has built a worldwide following acting in films like the “Blade” vampire trilogy, was sentenced to three years in prison in April for failing to file income tax returns for three years.

Mr. Snipes must pay up to $17 million in back taxes plus penalties and interest. In court, Snipes, reading from a written statement, apologized for his “costly mistakes” but never mentioned the word “taxes.” His celebrity could raise attention about tax defiance and deter protesters. Despite Snipes’ claims that he was taken advantage of, the actor was allegedly a “disciple” of the tax defiance movement.

The convictions for failing to file returns covered the years 1999 to 2001.

He had time to make amends here, but he didn’t! And isn’t it the case that high-profile individuals carry a higher risk for having the law catch up with them? But whether or not his “high-profile” status actually helps him out of this bind remains to be seen.

As for the legal consequences of tax avoidance: mind you, this only happens to those who knowingly break the law. Trust me – if you filed a week late, you are not going to be thrown in the chokey with Blade.

Avoid Tax-Related Stress

Being self-employed is great, as exemplified by the relaxing picture you see here:

self-employment, money, laptop by beach

You would of course, prefer to look that way rather than this way:

self-employment, business, tax audit

The latter scenario is where business owners end up finding themselves when they’re not completely crossing the t’s and dotting the i’s according to the IRS.

If you do ever receive an official letter from the IRS, it is possible that you have already been audited and they merely have a few questions to clear up. Very few people are truly put through the ringer. This being said, it is best to avoid the situation altogether. Since self-employed professionals are often under a microscope come tax season, you should follow the five tips below to avoid an IRS audit.

Avoid A Tax Audit With These Tips

Hire a Trusted Accountant

Some of us prefer to do our taxes without help and that is fine when things are uncomplicated. Services like TurboTax allow many of us to file taxes in under an hour without a problem. However, those who are self-employed often have a lot of paperwork to deal with. Hiring an accountant can help you to prevent any mistakes.

File Every Year, No Matter What

Can’t pay your taxes in full this year? That is okay! The IRS will work with you through an extension plan. One of the biggest mistakes made by the self-employed when April rolls around is not filing because they can’t pay what they owe. Always file, no matter what. Contact the IRS about your money situation and they will let you pay out the taxes. This results in some penalties, but that is far better than the alternative.

Report Your Full Income

One of the reasons why the IRS watches entrepreneurs so closely is because it is easier for them to underreport their income. If you are a freelancer who occasionally takes small gigs with no paper trail, don’t think you can neglect this income when filing your taxes. Finding inconsistencies is what the IRS does best and they will eventually catch up to you.

Don’t Get Too Creative With Deductions

There are usually two types of income tax filers who are self-employed:

1) those who are too scared to make deductions because they don’t want to be audited
2) and those who deduct everything under the sun with reckless abandon.

Don’t be either person! You should be able to make deductions, as they are there for your benefit. However, you need to make sure you legitimately qualify for each one.

Document Everything

One of the best ways to prevent mistakes is by having all necessary paperwork handy when you file. This is also your best defense against penalties should the IRS ever come knocking on your door. You see, a lot of deductions really can be a red flag to the IRS. If you can back up each one, however, you are perfectly within your right to claim those tax breaks. Back up everything and keep those documents in a safe, organized place.


Being audited really isn’t the worst thing in the world if you are totally honest when filing your taxes. Should you be audited and it is found that you have made an honest mistake, don’t panic. You might be penalized with affordable fines or merely told to correct the mistake. The IRS rarely burns those who practice honesty and caution when filing their taxes. By following the above advice, however, you may never have to find out for yourself.

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 15 comments… read them below or add one }

Mrs. Micah June 1, 2008 at 10:25 am

I do my best to log everything into spreadsheets just to make sure that I’ll be able to account for it at the end of the year. Still figuring out deductions.

David Carter June 1, 2008 at 11:41 am

Best tip I can give is don’t cheat the tax man. I think there is no honor in getting away with a crime. People love to brag about what deductions they used when they weren’t supposed to and how much they saved. I usually respect those people less after hearing that and don’t trust them either.

Las Vegas Real Estate Guy June 2, 2008 at 12:21 am

Death and taxes…. I think the IRS is looking even harder now at returns. The government is in a huge hole financially so they’re going to be looking real hard for extra money.

fathersez June 2, 2008 at 6:52 am

The taxman is one person I try my best not to rub the wrong way. I still have records from the day I first filed my taxes.

Your warning should be heeded.


David June 2, 2008 at 7:45 am

Switching from an income tax to a value added tax would allow us to eliminate the IRS, tax filing, tax record keeping, etc. It would save billions of dollars.

Kray June 2, 2008 at 7:52 pm

Gee thanks for your tips. I once failed to follow the first one…about the accountant… but now, I think I found a better one.
I’ll do these things and I’ll save big bucks! Thanks.

Goran Web Design June 5, 2008 at 12:30 pm

Well said. Its a lesson everyone should learn and that is that pay and do everything by the book as it will always catch up with you if you don’t. Sleep peacefully.

Craig June 6, 2008 at 3:57 pm

I recently moved from the UK to the US and registered my own business. I’ve definitely heard some horror stories about the IRS so I’m just gonna leave it all to my accountant.

I don’t want to run the risk of raising any flags by making mistakes by doing it myself!

Abaculus June 9, 2008 at 9:39 am

I have my own business. I am planing on letting a professional handle my accounting. Thanks so much for all your tips. I make sure to document everything and save all my receipts. I try to keep everything well organized.

Scott Gostyla June 13, 2008 at 4:57 pm

Yeah, one of my best choices I’ve made was to hire a professional to deal with my finances.

Tony - Nigerian Entrepreneur July 10, 2008 at 10:44 am

This is a good tutorial for self-employed that are confused about tax matter. To the best of my knowledge, hiring an Accountant to take care of tax matter is cheaper than running the risk of falling foul of the law. Thanks for sharing the tips.

Entrepreneur Blog August 7, 2008 at 4:48 pm

Great advice! I agree, it’s quite intimidating when you get to tax time and you’re self employed. A good accountant is much cheaper than all the penalties and fines if you screw something up. They may also be able to find some deductions that you missed.

Los Angeles Audit Attorney August 30, 2009 at 1:10 am

Thank you for pointing out the importance of filing – no matter what.

Mike Habib June 1, 2010 at 8:49 am

What are the chances of being examined? A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).

Big T October 15, 2011 at 6:29 am

Great article, funny how most people only think about taxes when that time of the year comes. It should be something we think about each day, like remembering to keep that receipt and track the “5-W’s.” One of the problems I found though was some of my receipts fading to a blank piece of paper after 6-8 months. I’m a small business owner and came across a site that has helped me with keeping my day to day deductions in check and also with backing up all the expenses digitally without taking any more time; in fact, it saves me time.

Leave a Comment