Unexpected Capabilities. Unmatched Service.
avoid IRS audit

7 Ways Your Small Business Can Avoid an IRS Audit

The words “IRS audit” are typically uttered with the same sense of fear as “root canal” and “public speaking.”

No one wants to go through it. Everyone will do just about anything to get out of it.

The good news is, much like brushing and flossing will help you prevent ever needing to get a root canal, there’s a lot you can do to avoid an IRS audit.

Think about it. The IRS, even when it’s not understaffed like it is now, doesn’t go around auditing people for giggles. It’s something the agency does when they believe a person or business is shortchanging Uncle Sam. So, as a general rule, if you’re honest and accurate, that will go a long way toward ensuring your small business avoids an IRS audit.

We’ll be clear: There’s no guaranteed, 100%-certain way to avoid an IRS audit. Human errors simply happen, and that alone can trigger the alarm. Still, if you’re looking for more specific guidance, these seven actions can make you much more likely to remain in the IRS’s good graces.

How Your Small Business Can Avoid an IRS Audit

#1: File taxes on time.

This is just good common sense. If you come into class late when everyone else is already sitting at your desk, your teacher will notice. And the IRS has very clear tax deadlines, so if a return is filed late, it’ll stick out like a sore thumb and draw more scrutiny.

#2: Pay taxes on time.

The same principle applies to tax payments. This doesn’t just refer to the annual payment most individuals associate with the April filing deadline. It also refers to quarterly payments — most small business owners who expect to owe $1,000 or more must pay quarterly estimated taxes, which includes both income and self-employment taxes.

Also, even if you can’t pay on time, you should still file on time. The penalties and other consequences are far worse if you also file late.

#3: Keep records, and keep them neat.

Great record-keeping can keep you organized and improve the accuracy of your filings. Keep payroll records, vendor agreements, receipts — anything with information you might eventually have to report to the IRS.

It also never hurts to be prepared in the rare event you are audited. The general rule is to keep previous tax returns and other tax documents for seven years. (Guidelines differ on other business financial data and records, but we recommend keeping these indefinitely, as they can have other useful non-tax purposes.)

Lastly, while sloppy records are better than no records, they’re not exactly good. If there are massive holes in your reporting, they’re more likely to trigger an IRS audit. Our advice? Keep physical records stored in drawers organized by type and date. Also, input data into accounting/bookkeeping software throughout the year rather than having to do everything all at once right before tax time.

#4: Avoid round numbers.

If you ask a friend how much something cost, and they respond, “Eh, I don’t know, $100?”, chances are the cost was somewhere in the ballpark of a hundred bucks, but it wasn’t $100.00 on the nose.

The IRS takes a similar tack when it comes to your taxes.

It’s rare for all of a company’s financial transactions to come out to big, round numbers. So if your return sports a lot of zeroes and is light on decimals, that might stand out to IRS personnel as a little too clean. (But if your numbers come out that way naturally, so be it.)

In short: Don’t round up or round down.

#5: Make legitimate tax deductions.

One really easy way to catch the IRS’s eye is to claim a wildly unrealistic dollar amount of deductions. If you try to deduct, say, $1 million, and you only brought in $1 million in revenues, you’re likely going to face an IRS audit.

Now, that crazy example was to illustrate a point, but even smaller discrepancies get noticed. The IRS knows that if you bring in a certain amount of income, there’s a rough range of how much you’ll be able to deduct. So if you claim more than that, the IRS will probably want a closer look.

Just be honest. Take what’s legal and that your records can back up. That way, even if you are audited, you can easily defend those deductions.

#6: If you use contractors, use them the right way.

Independent contractors play a vital role in many small businesses. But some companies use (and abuse) these workers to shirk paying payroll taxes. Because of this, the IRS keeps an eye out for heavy use of independent contractors as opposed to company employees.

The rules for using contractors are pretty straightforward, and largely pertain to how much control the employer has over when and how work gets done. So even if you primarily use contractors to run your business, as long as you’re managing them properly, you’ll be fine.

#7: Make a profit (at some point).

If this step made you panic a little, don’t worry. The IRS is aware that small businesses struggle and don’t always turn a profit. In fact, while the number varies from one year to the next, 60% of small businesses break even or operate at a loss. So if you have an unprofitable year or two, especially as you’re starting up, that’s normal, and the IRS likely won’t care.

However, if you go many years without a profit, expect the IRS to start sniffing around. That’s because occasionally, people will use a small business to mask their own personal losses.

Another Way to Avoid an IRS Audit? Talk to Us.

Small business taxes are complicated. There’s a lot that can go wrong — especially if you don’t have much familiarity with the U.S. tax code, which is the case for many founders and owners. And even if you make an honest mistake, the IRS has no way of knowing that — they just see the mistake and start investigating it further.

So if you want to avoid an IRS audit, trust professionals who work with taxes every day. McManamon & Co.’s experts boast decades of combined experience that they put to work across our varying business tax services, from simpler tasks, such as filing, to building out a yearlong tax strategy for your company.

McManamon & Co. is here for your small business tax, accounting and consulting needs. Call us at 440.892.8900 or contact us online today.

Tags:  , , , , , , | Posted in taxes