Being audited by the IRS can be a very stressful and time-consuming experience. No business owners would like that. While the odds of being audited are relatively low, taking steps to minimize the risk of that happening is crucial. From staying current on tax laws and regulations to keep accurate records, these ten tips can help you reduce the chances of an audit and ensure your business stays compliant all year.
- File your taxes. The IRS will work with you! One of the quickest ways to get into an audit is not to file your tax returns, especially if you owe money. Even if you can’t pay, file the taxes and figure out how to pay. Avoiding filing only causes more problems down the road (not to mention increases stress levels to the roof).
- Be aware of your industry averages and everyday expenses! You should never increase an expense because it wouldn’t be noticed; that’s tax fraud. But conversely, you should consider reducing an expense if it is far too high and will stand out.?Remain consistent and reasonable.
- Attach additional statements and comments, including additional information, with your return to substantiate potential expenses and oddities.? Suppose your file gets handed off to an agent for further review. In that case, an actual human can sometimes bypass your return for an audit because you already provided the support the Revenue Agent would be asking for.
- Avoid adding a Schedule C that had little or no revenue. Having a small business is a tremendous tax-saving strategy, but reporting it with little or no revenue and taking losses is a red flag and raises the odds of having unwanted attention on your tax return.
- When claiming deductions for paying sub-contractors, you must issue the proper 1099s in January following proper reporting procedures. If you still need to complete the deadline this year.? Don’t let it happen again.
- File payroll reports and remit your payroll withholding: If you have employees, you must withhold and pay the taxes.?This is sacred money in the eyes of the IRS, and you must always stay caught up on these reports and remitting withholdings. Moreover, if you own and operate an S-Corporation, having yourself on the payroll is just as critical.
- Avoid round numbers. You would be surprised how many tax returns we’ve seen with write-offs with line times with large round numbers.? For example, $4000 rather than $3979.22.? This is a major red flag.? How many people spend precisely $4000 on office supplies annually???The real trick is good bookkeeping to ensure your reported numbers are accurate.
- Don’t inflate the home office deduction. Take the home office deduction, and don’t be afraid, but don’t get too aggressive.? The home office deduction is legit even if you have an S-Corporation.? Try using the IRS-approved simplified home office deduction instead.
- Avoid excessive dining and travel expenses. These expenses should look normal, well-balanced, and conform to your income level and industry. For example, if you run an eBay business out of your basement in the evenings, I don’t think daily dining expenses will fly. However, if you are a sales rep on the road peddling products, those expenses will appear less aggressive and standard.
- Got a notice from the IRS? Don’t ignore it. You make it FAR worse if you ignore the IRS’s letters or requests for additional information.? Just like item #1 above, if you don’t file OR don’t respond, the IRS will assume the worst and get aggressive quickly.? Next, seek professional advice.? You never know if the letter/notice you received from the IRS is serious.
For tax questions, email us at [email protected] or get a call back by going to our tax page.
