Small business owners have a hundred things to deal with. The
finances are limited and cash flows are often erratic. Moreover, they cannot
afford large teams and have to handle a lot by themselves. If you are running a
small business, you will probably understand how pressurizing tight schedules
can be. Missing out on tax filing and payments is something that can happen
easily. So there are always chances that you may get a tax audit from the IRS.
To make things worse, audits can make your life stressful because they can be
hard to manage with an already packed schedule.
Imagine the stress that seeing an IRS audit notice can cause,
let alone the anxiety of having an agent at your doorstep! Your best bet would
be to avoid a tax audit in the first place because you would not want to deal
with the IRS. There are actually ways to avoid tax audits and being aware of
them can make all the difference. Here are some tips for small business owners
to cut down their audit risk to the minimum.
Check your numbers thoroughly
First things first, the numbers on your tax returns must be
accurate. Mathematical errors are easy to make and you may also write your
numbers wrong. Similarly, there could be some discrepancies between the numbers on your returns
and those reported by third parties you deal with. Such errors increase the
chances of tax audits for your small business. Also, avoid rounding up the
numbers because they are a red flag for the IRS. So you must double check every
piece of information on your return. Even better, you should have your returns
prepared by a professional accountant to ensure accuracy.
Maintain records and report income and
Another practice that can reduce the risk of IRS audits is
maintaining your records and reporting business income and expenses accurately.
Retain the receipts of the entire business expenses so that you can use them as
proof if a problem arises later in case of an audit. As a rule of thumb, never
hide your income or overstate the business expenses to reduce your tax burden.
The IRS checks every single item on the returns and will probably detect
intentional or unintentional discrepancies anyways and penalize you as well.
Claim only legitimate deductions
When it comes to IRS audits, claiming excessive deductions can definitely make the authorities skeptical about your intentions. Small business owners have multiple opportunities for claiming deductions but this does not mean that you should claim the ones that are not legitimate. Beyond just claiming the legitimate one, you should also have the supportive documents that justify the claims. And if you are not sure about the ones you can claim, you can consult tax attorneys who know how to deal with the IRS and their norms. They are the best people to advice and even save you from trouble if you get an audit despite the best efforts to avoid it.
If your business is a C corporation, paying high salaries to
the employees can be a way to reduce corporate profits and thus pay lower
taxes. As a result, the IRS may find high salaries suspicious and send a tax
audit to businesses that do so. If you want to avoid this, stick to the
industry standards and pay only reasonable salaries to the employees.
Do not report a loss every year
Small businesses often get into trouble with the IRS because
they report losses year after year just to save on taxes. If your tax return
shows a net loss in more than 2 out of 5 years, the IRS is likely to send your
business an audit notice. Moreover, there are even chances that they will
determine your business as a hobby and disallow the business expense deductions
File on time
Whether you run a small business or a large one, filing your
taxes on time is mandatory for all. Failing to do so can prompt the IRS to scrutinize your returns more closely, which
obviously makes you more susceptible to getting an audit. The best thing to do
is always file on time, well before the deadlines so that you keep your small
business away from tax woes.
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Though these practices can help you avoid a tax audit to a
significant extent, you may still get one for one or more reasons. It is best
to have a qualified tax attorney handling the case and settling tax
negotiations with the IRS to save your business from tax trouble.