10 tips for small businesses to reduce risk of an audit
by AccountingWEB on
Company.com, an information and lead generation services portal for small and medium-sized businesses, has provided us with a list of ten tips for helping businesses avoid IRS tax audits.
1. Make your business a business, not a hobby. If you are in your third year of business and reporting a third year of losses, that's going to raise a red flag with the Internal Revenue Service. If you can show the IRS the evidence, they'll understand that you're a loss-making small business -- for a while. If you're in year four and still making a loss, expect to hear from the IRS about when you plan to start earning money.
2. Report your income accurately. If a client pays you $3,250 for a service you provide, and you round that down to $3,000 while your client reports the actual number, that's a red flag, too. It tells the IRS that you're not keeping accurate records -- and they do cross-check -- so no rounding.
3. If you use a CPA or tax preparer, understand what they're doing and why. If you're uncomfortable with something that appears on your tax return, ask your preparer to explain it until it makes sense to you. Why should you do that? You should understand your tax information because you're ultimately responsible for the accuracy of your company's tax return, even if someone else prepares it -- and that means that you, not your preparer, will be liable for any additional taxes, interest charges, and penalties if you get audited.
4. Prepare to be audited from the first of the year to the last. If you keep your receipts, journal your expenses and mileage as they are incurred,, and keep accurate records of your income, you'll be able to show that you're not guessing at your numbers. Show the IRS auditor that you can't get the easy stuff right and you're just inviting a more thorough examination of your finances. Mark Green, IRS spokesperson for Georgia, told company.com that keeping good records of expenses as you incur them is "a must" for all businesses.
5. "Pay estimated taxes if you're a sole proprietor or independent contractor. Pay them on time, and keep them current." Green said.
6. Don't ignore notices from the IRS. If the IRS is trying to get your attention, answer them while it's still a polite cough. If they've to come to your door already, you're in trouble.
7. Watch out for the dirty dozen. The IRS publishes a dirty dozen list of the top 12 tax scams that they're going to be looking for on tax returns. Do yourself a favor -- make sure you haven't involved yourself in any of them. If you have, be prepared to admit it and face the possibility of an audit and penalties. You can't get out of paying taxes.
8. Don't borrow from withheld taxes. Your business has employees, and you've been withholding taxes from their paychecks to pay the IRS. It's been a tight month and you have bills to pay, so you think you might just borrow from the withheld taxes and pay the money back next month. And then you do it again a month later. And again. Before you know it, you've borrowed all the taxes you were supposed to send to the government, and you're still not earning enough to pay it back. DO NOT borrow from the taxes your employees have been paying, no matter how tempting it may be. The penalties for not paying withhold taxes are astronomical.
9. The IRS isn't stupid. It has a pretty good idea of what a reasonable range of dollars for your business's taxable deductions should be. If your company earned income in the lower end of the range and took tax deductions in the higher end of the range … then see item #1. The IRS is happy for you to take business deductions but if you have a yard service and you take a deduction for buying a crop sprayer plane to apply weed killer on your clients' yards, you're probably going to get audited.
10. Don't try to claim credits you're not entitled to. Do you let your sales team drive around in commercial farm vehicles? If not, you're not entitled to the Fuel Tax Credit. And if you didn't hire any recently released felons, you need to look at other reasons to claim the WOTC for the additions you made to your workforce this year.