12 Ways to Stay on the Good Side of the IRS

How to Stay on the IRS’s Good Side: 12 Smart Tax Moves for Real Estate Investors and Entrepreneurs

Navigating tax season can feel like walking a tightrope—especially for real estate investors and small business owners who often face more scrutiny from the IRS. But the truth is, staying compliant doesn’t have to be complicated. With the right strategies and a bit of discipline, you can avoid costly penalties, reduce your audit risk, and keep your finances in good standing.

Here are 12 effective ways to stay on the right side of the IRS:

1. File Your Tax Return—Even If You Can’t Pay

One of the biggest mistakes you can make is failing to file your return altogether. Even if you’re short on cash, file your taxes or apply for an extension. Not filing can lead to more severe penalties than simply owing money. Think of the IRS like a relationship—you need to stay in touch, or they’ll assume the worst. Filing something is always better than filing nothing.

2. Understand Industry Norms Before You Deduct

The IRS uses sophisticated algorithms to compare your return with others in similar industries. If your expenses are significantly higher than average, you’re more likely to attract attention. Ask your accountant to run a comparative review so you can flag anything unusual—and adjust or explain as needed.

3. Choose the Right Business Structure

While operating as a sole proprietor may seem simple, it comes with a much higher audit risk. In fact, sole proprietors filing Schedule C, E, or F returns are audited up to 12 times more often than S or C corporations. Converting to a corporation or partnership not only helps limit liability but also significantly reduces your chances of being audited.

4. Send Out 1099s—On Time and to Everyone Required

If you hire independent contractors, you must issue 1099s by the IRS deadline, typically in January. Missing this step is a red flag. Always collect W-9 forms before you pay any contractor to ensure you have their tax info on file.

5. Handle Payroll Taxes with Precision

For S corporations, payroll tax is a sacred area for the IRS. If you’re withholding taxes from employees, those funds must be reported and remitted promptly. Falling behind doesn’t just increase audit risk—it could lead to criminal charges. Treat payroll tax deposits as non-negotiable.

6. Avoid Rounded Numbers—Be Precise

When inputting deductions, use exact figures. Numbers like $5,000 or $15,000 can seem suspicious. It’s better to report $14,931 than to round up or down. Precision shows attention to detail—and helps you avoid unnecessary questions.

7. Keep Auto, Travel, and Meal Expenses Reasonable

While these expenses are legitimate, they should align with the nature and size of your business. If you run a small real estate operation from home, daily restaurant and travel deductions may seem excessive. On the other hand, if you’re regularly out networking, those expenses might make sense. Be smart, not greedy—the IRS knows the difference.

8. Watch Out for Odd or Vague Line Items

Anything that seems out of the ordinary—like a large “education” expense for a small business—can raise red flags. Be cautious with how you categorize and describe unusual expenses. A seasoned tax professional can help catch these issues before you file.

9. Show a Profit at Least Occasionally

If your business reports losses year after year, the IRS might treat it as a hobby rather than a legitimate enterprise. Under Section 183 (the “hobby loss rule”), you need to demonstrate a clear intent to generate profit. Consistent losses make that difficult. Have a business plan, track your results, and be prepared to show that you’re operating with real economic purpose.

10. Steer Clear of the “Dirty Dozen”

Each year, the IRS publishes its “Dirty Dozen” list of scams and abusive tax schemes. Being linked to any of these—even unintentionally—can draw serious scrutiny. Keep your tax strategies clean, and make sure your advisors are up to date with current IRS guidance.

11. Practice Honest and Accurate Reporting

Don’t guess. Don’t make up numbers. And definitely don’t omit income. Keep good records, understand your financials, and work with a qualified tax professional—especially if you’re running a real estate business or managing multiple income streams. Report every dollar and back up every deduction.

12. Keep Receipts and Stay Organized

Receipts won’t stop an audit, but they can drastically reduce the pain of going through one. Good records support accurate returns, help you avoid mistakes, and give you confidence in case of scrutiny. Whether you’re deducting home office expenses, rental property repairs, or contractor payments, documentation is your best friend.

Final Thoughts

The IRS isn’t out to get honest taxpayers—it’s looking for returns that stand out for the wrong reasons. With these 12 steps, you can blend in where it counts, stay compliant, and still make the most of your legal deductions.

Running a business or managing investment properties comes with enough challenges. Let taxes be one less thing to worry about—by filing smart, staying informed, and keeping your books in impeccable shape.