In the last few tax years IRS has been paying more attention to taxpayers who file a schedule C. These taxpayers are basically those who operate small, incorporated businesses.

According to Mark Everson, the IRS commissioner, the increase focus will be on those individuals who are filing 1040s and are operating businesses that are not incorporated. He Said, "the biggest portion (of unpaid tax) is in underreporting of income by individuals. Typically, that's individuals who are filing Schedule C."

Evidence has shown that some of these IRS audits can be pretty in depth in respect to reviewing bank records, computer files, and receipts. It is believed that Schedule C filers are more likely than the average taxpayers to overstate expenses and understate income. In many cases Schedule C filers claim personal expense, such as gas mileage, as business expense and the IRS is very much aware of these underpaid taxes. However, taxpayers are better off having expense on a Schedule C than having it on a Schedule A as an itemized deduction.

One reason why it is prudent for small business owners to prepare for a tax audit is the question of Social Security taxes. New business owners must remember that essentially the net income that they are going to report on the Schedule C is going to be treated as self-employment income and subject to the self-employment tax, says, Mel Schwarz of Grant Thornton. It is possible that you will be subjected to Social Security tax on the first $94,200 of wages in 2006 or $97,500 in 2007.

In view of this focus by the IRS, Schedule C filers should try to keep a good record of business income and expense receipts and prepare their documents in the case of an audit. If you are claiming deduction on items such as office supplies, organize you records regarding that purchase. In the case of a vehicle used for business purposes, keep an updated log including the dates the mileage was incurred and the destination driven.

The IRS will focus on issues such a whether an equipment or supply should be classified as a personal expense or business expense depending on what it is used for and for what percent of the time. To qualify for the deduction one has to use the item for at list 50 percent of the time. For example, a computer that is used 55 percent of the time for personal reasons cannot be claimed on Section 179 to write off the cost of that asset. Section 179 is a tax rule that permits companies to deduct up to $108,000 for the cost of assets that are used in their business which was bought during the tax year. It is important to note that not all assets are covered under Section 179. Real estate, for instance, can not be covered. Section 179 is geared towards small businesses and is used in the place of having to maintain depreciation records.

Small business owners have a host of options that they can select in minimizing their tax liability and increasing their tax return. They can purchase office equipment and supplies, computer, and other business expenses before the end of the year. It is recommended that all business expense get paid prior to year end for them to be deductible. 100 percent of certain business expenses can be written off in the first year. In addition, in the case of a vehicle, you are limited to a first-year depreciation of $3060. However, you can deduct up to $25,000 for some SUVs.

Defer billing customers and postponing income until early January or to bill clients so late in December that you would not be in receipt of income until January is a common way of reducing your income for the year, thus reducing your adjusted gross income (AGI). Before small business owners attempt to take advantage of tax deductions it is recommended that they consult a tax/accounting professional.