During the current economic downturn, some unemployed workers have tried to start their own businesses.  Being laid off provides a great opportunity to begin afresh and attempt to start the business you’ve dreamed about. 

Before you launch those dreams you hear about on Legalzoom.com commercials, keep in mind that there are a few critical bullets you should keep in mind when it comes to taxation, the IRS, and audit avoidance.

There is no word in the English language that can throw a business owner into a state of rigor more quickly than "audit." Visions of gestapo-style raids and years spent in a "gentlemen's prison" loom large at the very utterance of the word. The good news, however, is that even though the thought is unpleasant, the threat of a full fledged audit isn't particularly high right now (New York Times).

According to the IRS, the rate of person-to-person audits is lower that it ever has been since the Securities and Exchange Act of 1934 was enacted. Most audits now are "letter audits", which means that the dispute can usually be settled by having your accountant discuss the issue with an IRS field agent.

One of the reasons the IRS targets small businesses for audit is because of the "fast and loose" way some business owners claim deductions.

For example, if you are claiming a home office, WATCH OUT. This is not only a red flag; it's a BLOODY red flag! Of course, it's perfectly legal to do this, especially if the majority of your administrative tasks are done at home. But, some people try to take a mile when they should be satisfied with a mere inch, in this regard.

If you DO claim the space, fine. Just don't try to deduct ALL of your utilities and ALL of your rent or house payment as business expenses. Instead, if you want to stay under IRS radar, base your deductions for these expenses on the square footage of your home. If your home is 2000 sq. feet, and your office takes up 500 square feet, which is 25% of the total, then deduct only 25% of your utility bill and house payment. If the amount of "office expenses" you deduct sounds too high, you can be sure that the likelihood of being audited has risen.

Another red flag has to do with payroll taxes. When small businesses go through financial difficulty, the first thing many of them do (much to their detriment) is to stop making their payroll tax payments in a timely fashion. The IRS shows very little mercy in this regard (think "Timothy Geithner"), as the taxes you withhold from your employees' paychecks was never yours to begin with. You are simply serving as an intermediary between your employee and the IRS. So when you fail to give the government their due, all of your financials can become suspect. As an accountant, I know of several "former" small business owners who are still trying to satisfy penalty and interest payments from payroll tax neglect, even ten years after closing the doors of their businesses.

In these days of detailed accounting software systems such as QuickBooks, many small business owners make the mistake of thinking that they don't need a professional accountant or CPA to help them with their finances. This is a mistake. At the very least, you should have a professional do an internal audit of your books every quarter. A good rule of thumb is to have your accountant go over your financials right before quarterly returns for payroll are due. That way, if you've made a mistake, it can be easily corrected before interest and penalties are added on.

If you are planning to start your own business, be smart about it. Hire an accountant, and make sure all of your financial ducks are in a row. That way, you can help insure that you will lie beneath the IRS radar, which is where you want to remain.