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5 Tips to Avoid a Small Business Tax Audit

The term “tax audit” strikes fear into the hearts of just about every American, but perhaps no one shudders as much at the mention as small business owners. After all, most of your life may be wrapped into your company, and a small business tax audit threatens to rattle your whole world.

There’s no way to completely guarantee the tax man won’t cometh for a second look, but you can significantly lower your chances of an audit by following these guidelines.

Avoiding Small Business Tax Audits

  1. Keep records around. Financial information, such as payroll records and former tax filings, even agreements with vendors – make sure you have electronic and/or paper records on hand for everything, and hold on to them. Keep business financial data around indefinitely (because that can be helpful for more than just tax purposes), and keep previous returns and any other tax documents around for seven years.
  2. Keep accurate records around. If your record-keeping is sloppy, your folder of old filings will just be noose the IRS hangs you with. And don’t think “I’m not good at accounting” will get you much sympathy from the tax man, either. That means the onus is on you to not just give an honest representation of your finances, but also an accurate account of them. (For instance, avoid rounding numbers up or down.) Whatever you can do to eliminate mistakes will help keep you out of the IRS’ crosshairs.
  3. Watch your deductions. If you make $200,000 in income and try to deduct $200,000 of that … you’re going to get a call. But it doesn’t take that much of a discrepancy to catch the IRS’ eye. In short, the IRS has its own system that determines roughly how much a company should deduct at varying levels of income, and if you come out above that, the IRS likely will ask you a few more questions. In other words, don’t try to stretch the truth when it comes to deductions. Take what’s legal and defendable, and keep records so you can justify each deduction if it comes to that.
  4. Make money. OK, that’s obviously your goal in the first place. But in addition to the idea that making money is a pretty accurate gauge of a successful small business, actually having income helps keep the IRS off your back. That’s because more than a few unscrupulous people have previously used small businesses to help cloak personal losses. This doesn’t mean you should panic the moment you realize you’re going to have a down year, but a few consecutive years of red ink will probably result in an audit.
  5. Talk to us. Shameless plug? Hardly. Ask most small business owners for their advice on how to stay in the good graces of the IRS, and they’ll tell you to talk to a professional. That’s because the U.S. tax code isn’t exactly user-friendly, and it changes constantly, making it difficult for anyone – especially time-cramped business owners – to keep up. For certified public – like those at McMananon & Co., LLC – keeping tabs on the tax code is what we do.

There’s a lot you can do to keep yourself out of the auditing muck, but we can do even more. McMananon & Co., LLC has been helping small and midsize businesses with their tax needs, including IRS audits, for more than 40 years. If you want assistance keeping your business in the IRS’ good graces, call us at 440.892.8900 or send us a message

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