How Small Business Owners Can Avoid an IRS Audit

If there is a fear business owners have over most others, it is an audit from Uncle Sam. Small businesses are highly susceptible to an IRS audit because of the extensive itemization of the returns they typically file. To avoid an IRS audit, a business needs to structure their tax paying and filing activity in a way that is not likely to draw attention from the government. Here are some ways to accomplish this:

Keep Detailed Records: One of the foundational steps toward staying out of trouble with the IRS is keeping detailed and accurate records. Many small business owners fall short in this area because they are too busy running their business and do not feel they have time to keep track of every detail. But if you ever run into discrepancies with your numbers, the failure to have detailed records could mean paying more than you should simply because you did not have the records to back up your claims.

Make Sure your Tax Reporting is Accurate: Along the same lines as keeping detailed records, it is important to report your numbers accurately. Avoid estimating your expenses and/or rounding them to an even amount such as $1000 or $10,000. Instead, use the exact figure, such as $997 or $10,138. Numbers like these look far more legitimate to the reporting agencies, and are far less likely to invite greater scrutiny.

Avoid Common Red Flags: There are certain red flags that the IRS looks for on business returns. These include:

  • Expenditures that do not match: Be sure that the amounts you report on forms such as 1099s and W2s match up with the deductions you claim. If there is a wide variance between these numbers, the IRS may request further information to help reconcile the discrepancy.
  • Higher Operating Costs than Gross Revenues: When you run a small business, it is assumed that you should be turning a profit after a few years. While you may have higher overall operating costs than revenues for your first couple of years while being established, the IRS is going to expect your revenues to exceed operating costs before long. Otherwise, they assume you would no longer be in business.
  • Excessive Home Office Expenses: If you run a small business out of your home, there are certain deductions you are allowed, such as a home office, vehicle mileage, and travel/entertainment. As mentioned earlier, keep accurate records for these and avoid being too aggressive in claiming these deductions.

Hire Professional Help: At the end of the day, small business people need to focus their energies on running their business. As such, it is wise to consider investing in the help of a reputable accountant to help manage this critical area. Doing this will ensure that you have a Chandler based accounting partner in your business that is staying on top of the continual tax law changes and employing best practices toward keeping out of trouble with the IRS.

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