The stress of a tax audit is enough to keep small business owners up at night in fear. The IRS sends a letter to the small business owner, asking for documentation to help clear up an issue or discrepancy that the IRS found in the tax return.
And while only a very small number of small businesses will be audited, it’s important for a business to do all that they can to avoid being audited.
1. Avoid Reporting Losses Every Year
The IRS can decide to classify your business as a hobby if you continue to report losses every year. Businesses can and do report losses, but if you report a net loss two times in a five-year period, your business will have a much higher chance of being audited.
The IRS may decide that your business is a hobby, and you can’t deduct expenses for a hobby.
If you owe the IRS money, don’t ignore your payment. “The Internal Revenue Service can issue a notice of a federal tax lien when a business or individual taxpayer fails to pay their taxes in full and on time,” writes Randolph Law Firm, P.C..
2. Check Over Your 1099s
It’s easy for you to type in the wrong number when entering in your tax information. All 1099s that you receive will also be passed on to the IRS. When comparing documents, the IRS will look to see if you entered in all of the right numbers.
If you meant to put a “9,” but hit “0,” this can mean a big discrepancy in your taxes.
Normally, the IRS will send you a notice of the issue, and you’ll be able to correct it quickly. But there’s also a real risk that the IRS will audit you, too.
When numbers simply don’t add up, it’s a red flag for the IRS. An easy way to avoid any of these discrepancies is to double-check all of your information. A quick review of all of your figures may be enough to avoid an audit.
Hire an accountant or use tax preparation software to help reduce the risks of errors.
3. Keep Detailed Records
As a small business owner, it’s easy to get caught up with your records. You may find that you keep records haphazardly, and this can be very bad come tax season. Detailed records, particularly of your expenses and income, are essential.
You’ll find that these records make doing business easier.
Preparing taxes will be much easier when you have detailed records. Detailed records not only help with the accuracy of your taxes, but these records will be able to be used in the event that you do get audited.
All you have to do is hand over the documentation to the IRS during an audit, and if it all is inputted properly, you can sleep well at night knowing you have every last expense and income documented.
Keeping detailed records is a must, especially if you hire independent contractors, which are often viewed as a way to avoid paying payroll taxes.