Six Steps to Ease the Pain of an Audit

So, befriend a tax preparer who works year-round. Frederick Daily -- author of several tax books, including Stand Up to the IRS (Nolo) -- recommends staying away from the chains since their tax preparers are seasonal. And for most small businesses, an enrolled agent should suffice. A certified public accountant should be used, says Daily, if the company grosses $1 million a year and has more than just you as an employee.

Hire the Right Tax Preparer

The IRS is less likely to audit you if your tax filer has a solid reputation with the government agency, says Jack Miller, author of Simply Success: How to Start, Build, and Grow a Multimillion-Dollar Business the Old-Fashioned Way (Wiley). "The IRS always looks at who signs the tax forms."

Honesty Is the Best Policy

Cash-based ventures face the most scrutiny. So report all income and deductions. But be careful about reporting a loss at the end of the year, says Daily. "The wife has a home business and the husband has a salary. Her business loses money. The effect is a lower tax liability. A small business loss will attract IRS attention. Perhaps forgo the loss rather than increase the audit risk."

Compensation is also another IRS attention grabber, says Ochsenschlager. "If you're paying yourself a small salary, you need documentation as to why you're retaining earnings in the corporation," he says. "You're going to pay taxes whether you distribute it as a salary or a dividend. You need a good rationale as to why you're keeping the money in the company."