An IRS audit or a tax audit is a review of a business’ accounts and financial information to verify that the tax amount reported is correct. This is one of the things many small business owners would like to avoid.
While there is no way to completely avoid the audit, there are certain things you can do to minimize your exposure. In this article, we will discuss about some of the tax practices you as a small business owner can take to minimize the risks.
Double-check numbers
Provide complete information and make sure you are detail oriented when filing your tax. Double-check all the numbers and totals that you report. There are many chances for you to miss a digit or to transpose a number. In general, audits are triggered when IRS is checking your figures against those reported by other sources, and comes up with a different number.
Cross check the limits on percentage amounts for business deductions. For example, you can deduct fifty percent on your business meal, but if you take hundred percent, it is likely to rise the flag.
Verify unusual income and expenses
IRS personnel will have an idea of typical income and expenses of a given business. Expenses that are more than average or unusually low income can stand out. You need to be ready with the supplemental material to prove that these unusual numbers are because of some perfectly legitimate reasons – may be a natural disasters for low income and new marketing plan for more expenses.
Business entertainment expenses
Entertainment and travel expenses claimed will be given a hard look. If entertainment expenses are higher than average in your tax return, it may raise alarm and will have more chances of an audit. You should keep receipts of all business entertainment and travel expenses.
Do not give rounded or averaged numbers
Rounded or averaged numbers in our regular life may be common but they can trigger an audit when it comes to tax returns. If your business’ sales were $10,003.43 in a financial year, mention that full number. Don’t round it off to $10,000; this will convey to the IRS auditor that your entire tax return is inaccurate.
Only in some rare cases where the suspected fraud is substantial, IRS is going to come to you in person. Otherwise, the field audits are very uncommon. In general, if they discover a mistake, they ask you to mail in more documentation.
Tax filing for small businesses is a complicated process; it is more than checking miscalculations. It requires skill and experience. So it is better to consider a tax expert for advice on how to proceed.