Filing a tax return can be a frustrating, anxiety-inducing task. Many small businesses struggle to keep up with tax deductions, income, and understanding how certain indirect costs can be claimed. Tax filing is scary not only because of that but also because everyone is afraid they are claiming something they shouldn't and a tax audit might uncover this. Avoiding a small business tax audit has long been the goal for most of us.
What is an Audit?
An audit consists of the IRS reviewing and examining a business's financial information and accounts. The goal of this process is to ensure that all information is being reported in a manner consistent with tax laws. It also aims to verify the reported amount of tax to make sure it is correct.
Advice To Prevent A Small Business Tax Audit
There are some tried and true ways to make your small business less likely to be audited. While these won't guarantee freedom from an audit, following these rules will cut down the chances of going through a tax audit.
- Keep it honest, accurate, complete and on time: If you are claiming all of your income rather than hiding cash purchases, you are more likely to stay off of the radar. Keeping track of income and expenses is key to filing not only on time but presenting a truthful picture of your company.
- Do not use vague expense terms: Words such as miscellaneous shouldn't be used. In addition, avoid using expense categories that are strange or unprecedented. The IRS wants to know what your expenses are and you don't want to give them a reason to question your spending. Also, be wary of using tax write-offs such as a home office deduction or charitable donation. These can be red flags for the IRS.
- Pay estimated tax payments on time: This shows the IRS that you are a serious business and that you want to pay your taxes.
- Issue 1099s and W-2s as needed: Make certain that you are following IRS guidelines on 1099 and W-2 requirements.
- Become incorporated: Returns with a Schedule C, a self-employed form filed with your personal tax return, are often targeted for a tax audit.
- Keep solid, unmistakably clear records: Organize all your receipts in one place. Using small business software that tracks income and expenses is an excellent way to ensure you are claiming all income and deductions.
- Have a separate checking account for your business: This will allow you to make certain your personal and business income and expenses are completely separate.
- Beware of having too many expenses versus the amount of income: This is called the income-to-deduction ratio and the IRS will often require an audit of returns that are greater than 52%. This is especially true for higher-income small businesses as well businesses that claim large deductions in one category.
- Use a payroll service: A payroll service will ensure that the correct amount of taxes are being taken out of the paychecks. In addition, your payroll taxes will be paid on time. You could also opt to use payroll software that will calculate everything for you and prompt you to pay payroll taxes when due.
Work With CPA Professionals To Prevent A Tax Audit
This list is certainly not comprehensive but are some of the more important ways you can avoid a small business tax audit. One more way to safeguard against a tax audit is to hire a professional CPA. Chandler & Knowles has been in business since 1996 and we have a vast amount of experience in helping small businesses, contact our team today.