Tips For Small Businesses To Reduce Their IRS Audit Risk



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 expenses accurately

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.

Do not pay high salaries to employees-cum-shareholders

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 you get.

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.



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