Five essential tips small businesses can use to reduce chance of audit
Tax season is here, and the last thing any small business wants is to face the scrutiny of the Internal Revenue Service after filing their return. While an audit isn’t a reason to panic, it can still be a stressful ordeal for which you could be faced with penalties or fines if you don’t have everything in order.
To file your tax return with the IRS, you must provide detailed information about your company’s finances including total income, total expenses and any deductions or credits you seek to claim for that tax year. If the IRS has reason to believe you haven’t been forthright on your return — or if there are errors in your paperwork — they could very well come knocking on your door.
Due to the fact that the IRS has stated it will be auditing 50% more small businesses this year, it’s even more vital to thoroughly prepare for this year’s tax return.
Here are my top five tips to safeguard your small business against an audit this tax season.
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Make sure the numbers add up:
While making sure all of your numbers add up can be a painstaking process, it’s one that is absolutely necessary. If the IRS notices a discrepancy in your totals, they might issue a notice or audit your return.
It’s easy to make mistakes, so be sure to triple check all of the information on your return and do the math multiple times to be certain it’s correct. You should also avoid calculating your income and losses with rounded numbers; while this might make things easier in the short term, it could lead to inconsistencies down the line. Remember that your employees will be sending in their own files on what they earned for the year, as well as third parties, so your return needs to match this to a T.
Be sure to report all
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your income: This is a big one. The income that you report must exceed the total amount reported on 1099 forms. If the total number from your 1099s is higher than what you report on your return, the IRS will likely flag you for an audit.
It’s more common for taxpayers in high-income brackets (over $200,000 per year) to be audited, and with many small business owners falling in this category it’s important to ensure that nothing is being concealed.
File on-time, and
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completely: Being punctual with your tax return might seem like an obvious piece of advice, yet we still see small businesses filing late year in, year out — resulting in unnecessary audits. The same goes for filing a tax return that’s incomplete; that’s a surefire way to attract some unwanted attention.
While you should avoid filing so early that your records used to prepare the return don’t include months that fall within the tax period itself, filing on time is an absolute necessity if you want to avoid penalties. If you know that you will not be able to submit your return by the deadline, you can file for an extension.
Be mindful of independent
● contractors: If you hire independent contractors at a high ratio to employees, this could raise eyebrows with the IRS because this is often used as a way to avoid paying payroll taxes. You’ll need to pay close attention to IRS guidelines on what constitutes an independent contractor vs. who can be categorized as an employee.
This has been a big issue as of late, especially with companies like Uber and Lyft facing scrutiny around how they classify their independent contractors. Make sure you follow the rules and if you have any doubt, consult an accountant or tax lawyer.
Hire a professional:
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Filing a tax return might seem easy enough to follow in theory, but there are a number of nuts and bolts that you’ll have to have in place if you want to prevent the headache of an audit down the line. For many small businesses, consulting a professional bookkeeping and accounting service can help you keep a clean set of records, get a handle on your credits and deductions and correctly fill out a business tax return.
This is by no means an exhaustive list of all of the ins and outs of filing a business tax return; businesses will have to do further research to make sure they minimize their chances of an audit. While tax returns can be a headache for small businesses, they are an unavoidable part of any professional endeavor. It’s those organizations who make sure their books are in order year-round who will avoid much of the tax season stress.