A business tax audit is an examination of your financial accounts and statements done by the IRS to make sure there are no discrepancies in your business tax returns. Just because businesses are rarely audited, doesn’t mean it never happens. Self-employed individuals, sole proprietors, and small business owners are more likely to be audited than most. It’s nothing to worry about if you have nothing to hide, but it can be an incredibly intimidating and time-consuming process. Here’s how you can prevent it from happening.
Don’t misuse your tax deductions
There are plenty of tax deductions to help out businesses financially with their operations. But just because you can, doesn’t mean you should. If you don’t need to take certain deductions, then refrain from doing so. This is something that will get flagged in a tax audit. From something as big as a vehicle to something as small as a tool like a wrench or a centrifugal pump, it’s better not to invite scrutiny by abusing tax deductions and filing them only when you absolutely need to.
Refrain from having consecutive years of losses
Filing tax returns as a business means that you need to show that you actually make money on a regular basis. If your tax returns reveal that your business has lost more money than it’s earned on an annual basis and you can’t provide proof of any other sources of income, you’re more likely to be subject to the inquiry of the IRS.
Obtain written acknowledgment for charitable donations
Excessive charitable donations on behalf of your business can look suspicious. For every charitable donation worth over $250, you need to obtain a written acknowledgment as proof that you’re making legitimate contributions to a credible institution.
Maintain steady expenses
Your financial reports should reveal stable and uniform expenses that are commensurate with your yearly revenue. Any significant inconsistencies across the board will alert the IRS and potentially trigger an audit. Don’t forget that you aren’t the only one reporting your business’ numbers. Your contractors and employees are also required to disclose what you’re paying them. The IRS can double-check your report with the data they’ve collected on file, so it’s best to turn over only the correct numbers to them.
Double-check your business income tax returns
Incomplete and incorrect tax returns look suspect to the IRS and may prompt an audit. It’s important that you ensure that your income tax return is completely filled out and contains the correct information. Once you’ve completed your tax return, go over it multiple times before you turn it in to be absolutely certain you’re submitting the most accurate data.
Always pay and file your taxes on time
There are plenty of due dates and cutoffs to take note of when filing your business tax returns. It’s necessary that you meet all these filing deadlines. Otherwise, you risk having to pay late penalty fees and interest or triggering an audit. If you’re certain that you won’t be able to make it to a certain cutoff or deadline, requesting for a filing extension which will give you more time to submit everything.
There’s nothing to worry about when it comes to tax audits. They don’t often happen, and they won’t affect your business if you file your tax returns correctly and truthfully. However, they can be tedious and time-consuming, so be sure to keep these tips in mind if you want to avoid any difficulties with the IRS.