Small Business Tax FAQ
I want to start my own small business. What do I have to do to keep out of trouble with the IRS?
8. I want to start my own small business. What do I have to do to keep out of trouble with the IRS?
Start by learning a new set of "3 Rs": record keeping, record keeping, and (you guessed it) record keeping. IRS studies show that poor records -- not dishonesty -- cause most small business owners to fail to comply with their tax reporting obligations and to lose at audits, with resulting fines and penalties.
Even if you hire someone to keep your records, you need to know how to supervise him or her -- because if your bookkeeper goofs up, you are responsible. Consider using a computer to keep your records if you aren't already in the electronic age.
Keep all receipts and canceled checks for business expenses, and keep them organized and in a safe place. Separate the documents by category, such as:
- auto expenses
- entertainment, and
- professional fees.
Put your documents into individual folders or envelopes. If you are ever audited (and small businesses are about three times more likely to be audited than individuals), the IRS is most likely to zero in on business deductions for car expenses and travel and entertainment expenses. Furthermore, the burden will be on you -- not the IRS -- to substantiate your deductions.