How Can a Small Business Avoid an IRS Audit?
If you wanted one overarching rule to live by to keep your small business from facing an IRS audit, it’d be “just act right.”
Naturally, the actual guidelines you should follow are a bit more granular.
We’ve mentioned before that not every single audit is a reason to panic. Indeed, a regular small business audit performed by an independent, third-party provider can actually keep you from having someone from the IRS perform a similar scrutinization of your numbers.
But an audit from the Internal Revenue Service can be stressful … and if you indeed haven’t acted right, result in fines and other penalties. You don’t want that. The following are some ways you can ensure your small business avoids an IRS audit.
8 Tips for Avoiding an IRS Audit
File Completely, Punctually: This seems obvious, but we wouldn’t be mentioning it if so many small businesses weren’t guilty of it. In short, failing to file a tax return on time, or filing a tax return that’s not completely filled out, is an easy way to score yourself additional attention from the IRS. Just don’t file too early – if the IRS receives a return in November for a period that’s supposed to include the upcoming December, that will raise some eyebrows.
File Accurately, Too: You’re not the only source of financial information for your company. Your employees, for instance, will be sending in files reporting what they earned for the year, so if your filing says something else, the IRS will begin to ask questions. Moreover, you’ll get another once-over if your own numbers don’t add up. While you should be striving for accurate numbers anyway, understand that failing to do so can be an immediate signal to the IRS that something isn’t quite right.
Make Your Estimated Tax Payments on Time: If you’re the smallest of small businesses – namely, self-employed – and you expect to make any more than $500 in a year, you’ll have to make quarterly estimated tax payments. Not only will failure to do so get the IRS’ attention, but it could result in penalties.
Don’t Keep Losing Money: Losses happen to even great small businesses that end up being wild successes. But a pattern of losses can raise suspicions, and rightly so: It’s difficult to stay in business if you keep bleeding red ink. There’s little you can do about this one other than to be mindful of it – if you reported a loss in the previous year and know you’re going to be close to a profit at the end of the current year, do what you can to realize positive earnings. Just know that a string of losses may put you on the IRS’ radar.
Be Mindful of Independent Contractors: Some companies rely heavily on independent contractors (or freelancers) as a way of avoiding payroll taxes and other costs associated with full-time employees. This is no small issue: California has already passed a “gig economy” law in response to the likes of Uber and Lyft, and that has sent other freelance-reliant industries into disarray. For now, just make sure that employees and independent contractors are classified properly, and that the people you enlist as the latter qualify for that status.
Be Honest About the Home-Office Deduction: Enough self-employed business owners have skirted this deduction that the IRS keeps a watchful eye on it. In short, a home office has to be a dedicated space for business use in your home. If it does a significant amount of part-time work as, oh, say, a living room, bedroom or kitchen, you’re running afoul of the law.
Keep Your Deductions Separated: The most obvious example of this would be taking a trip to Florida for a personal vacation but reporting it to the IRS as business travel to score a deduction. Sure, that’s about as blatant as you can be, but there’s also plenty of gray area when it comes to travel, technology and entertainment expenses. Keep clear records of purchases when you make them so you can properly document expenditures as personal or business, then be honest when you’re claiming these various deductions.
Hire a Pro: On their own, each of these tips and tricks seem easy enough to follow. But the truth is that keeping a clean set of business numbers, understanding the various tax credits and deductions, and correctly filing out a business tax return … well, that starts to become a lot more difficult. That’s why many small businesses entrust their taxes to the pros, and that’s why you might want to as well.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses, and we’re ready to help you with all your tax needs. Our tax services include federal, state and local tax obligations, as well as payroll taxes, compliance services and more. In short, whatever your need, we’ve got you covered.
Stay on the right side of the IRS this and every year. Call us at 440.892.9088 or contact us online today.
Tags: audit, IRS audit, McManamon, small business, small business taxes, taxes | Posted in accounting, McManamon & Co., small business, small business taxes, taxes