How to Avoid Tax Audits by Incorporting Your Business

Updating my 10-year old post, How to Avoid an IRS Tax Audit: Incorporate Your Small Business, the IRS' own most recently available data (for tax year 2017), show that, for a taxpayer with $100,000 or more in gross revenue, the chances of being subjected to an audit vary substantially based on whether the business was operating as a sole proprietorship reporting taxable income on Schedule C of the owner's personal income tax return (1040) or an incorporated business reporting income on a corporate tax return (1120 for C corporations, 1120S for S corporations), with unincorporated sole proprietors being 12 times more likely to be audited by the IRS:

Sole proprietor:  2.40%

Corporation:  0.20%

Incorporation To Avoid IRS Tax Audits

According to this Wall Street Journal article, sole proprietors filing Schedule C with their personal (1040) tax return to report business income are 10 times more likely to end up involved in the stress, annoyance, and time consumed with an IRS tax audit:

IRS Statistics [Excel file] show that you are 10 times as likely to be audited as a Schedule C filer than if you incorporate your business and elect S corporation status. While it costs a bit of money to incorporate, the move affords you greater personal liability protection and reduces your chances of being audited. In deciding whether to change your business status, include both tax and non-tax factors.

Note: Forming a limited liability company for one owner will not give you any audit protection, because the owner still files a Schedule C.

"10 Ways To Avoid A Tax Audit," by Barbara Weltman, April 15, 2011