If you ask an accountant what commonly causes an IRS audit, many will say mixing personal and business expenses is the number one trigger.

Each year the IRS audits around 1 percent of all U.S. taxpayers or about 1.2 million people.

My company, cloud accounting software platform, Xero, recently asked a few hundred accountants what the most common mistake small business owners make that triggers an IRS audit. A whopping 39 percent said mixing business and personal expenses in deductions is what most commonly raises a red flag.

Many small business owners use the same accounts for their business and personal transactions so it's a very easy thing to muddle up. Just 14 percent of those surveyed said they were focused on separating their professional and personal expenses.

To help freelancers and small business owners differentiate their expenses, Xero recently launched TaxTouch. The app draws in data from your bank accounts and credit cards so you can simply swipe left for personal transactions and right for business ones.

No one wants to be scrutinized. A quarter of accountants said avoiding excessive deductions can help ward off an audit.

The IRS is very systematic in the way they decide who gets audited. When a tax return is filed, it's compared to what the IRS considers industry norms, if the return is outside the standard, it's flagged and examined by an auditor. It's up to the auditor to either accept the return or open up an investigation to double-check your numbers.

Audits are painful, they're time-consuming and can be costly. Even if you're telling the truth (the whole truth) and your numbers are all as they should be.

Using technology to keep good, clean records not only helps you keep track of what your take home income is, or what your tax bill may be, t also makes it easier to deal with an audit.

Accountants are usually well-versed in how to deal with the audit process. Interviewing more than 300 accountants, 60 percent said clients often claim deductions that actually may not be allowed, while 41 percent said many small business owners are missing out on deductions because they didn't realize they were entitled to the write-off.

By not working with a trained tax pro, small business owners risk either missing out on lowering their taxable income or end up making a mistake on their return which winds up getting them audited.

Published on: Mar 31, 2016
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