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Tidy Taxes: The Best Ways to Avoid a Small Business Audit

by Simon Hopes Author

As a small business, you really don't want to get audited by the IRS. It's very unlikely that you will if you follow regular principles of tax claim, but it is still possible for your business to meet its audit.

In any case, you can also minimize the chances of your getting audited in a variety of ways.

In this article, we will cover some easy ways and specific business scenarios that will help reduce the likelihood of an audit.

Keep reading to learn more.

Consistent Loss Is A Red Flag

Not every business has a great year every year. Well, at least on paper. When it comes to debits/credits, if you've made some large long-term investments—your business might be at a loss. If your sales have been under par because of some political crisis—your business is at a loss once again.

It's perfectly fine to file your taxes at a loss. But if this keeps happening year after year, the IRS is going to be wondering why you're still in business with continuous losses.

And what do they think? They think you're taking in profits that you're simply not reporting. So keep this in mind.

Rapid Unsupported Profit Change

If your business has had a steady growth in profit over the past few years, and you somehow decide to file a large profit change this upcoming year, the IRS will be all ears.

This doesn't mean that you should prevent your business from innovating, taking on new projects, and going for that big fish. It just means that you should have the supporting documentation to help show the IRS: what expenses, decisions, and activities have brought you to this new success.

Collect all invoices and receipts, make it part of the bigger picture. If you need to use, a pay stub generator.

Caution Yourself With Deduction

Businesses have the ability to file a significant amount of deductions. And if you think it's a good idea to max them out, you're right. But if you don't have to take a deduction, then don't.

If you're claiming your personal vehicle costs for 100% of business transportation, are you saying that you never use it for other purposes? The same goes for technology, offices, food allowances, etc.

If it's a business deduction, then it should be a business deduction. Nothing else.

File Correctly

When you file your documentation, you are not the only conduit for financial expression. Any employee, any vendor, and other financial institution will do their part in reporting what you paid them or what they paid you.

Sure, an error can happen on paper. But if you're altering your number on purpose, the IRS can simply cross-compare your report with other reports on file, and that's when you are nagging for an audit.

Further, if you want to prevent suspicion, file your tax return every year, even if you're at a loss. If you fail to file or file incompletely, you are practically asking for an audit of your small business.

Limiting Audit Risk for Small Cash Businesses

If your business is conducted primarily in cash, one might think that it's not a bad idea to underreport the income, because there is an easy trace on the transactions, unlike credit cards, checks, etc.

But even then, the IRS knows how to identify if a cash business is underreporting:

  1. If your reports don't support your cost of lifestyle.
  2. If your business operates with continuous losses each year.
  3. If your business assets increase despite losses.
  4. If your business has low-profit margins and low annual sales compared against other businesses of a similar type.

As a cash business, you have to report all of your cash income. But you also have to file a Form 8300 for all cash transactions over $10000. If you fail to do so, the IRS will send an audit to detect criminal activity.

Limiting Audit Risk For Small Business with Independent Contractors

The IRS is known to keep a closer eye on companies that have employees as independent contractors because it's common for a business to treat a worker as one instead of a full employee.

It simply saves money by not having to file payroll taxes and pay for benefits. If your business has many independent contractors, then you're in for a treat.

The state is known to frequently audit a business that has many independent contractors for the increased risk of payroll unemployment and disability insurance tax avoidances.

If the IRS finds that your business has misclassified a worker, it will instill a federal tax audit, which you definitely don't want to have.

You should involve yourself in learning about worker categorization from the official IRS criteria for compliance.

Small Business Audit Prevented

Now that you have uncovered the simplest ways to prevents a small business audit, you can finally at least minimize the likelihood of one happening. Even though it's impossible to completely prevent an audit from happening, you can follow the guidance outlined in this article to ensure the most minimal likelihood.

A federal tax audit isn't so bad, as long as you know that you have nothing to hide. You might have miscalculated, you might have had an error outside of your control— so don't worry. If you've passed an audit once, you can rest assured that you won't have to perform another for a while.

If you're interested in similar articles, check out the rest of our blog.


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About Simon Hopes Advanced   Author

109 connections, 1 recommendations, 355 honor points.
Joined APSense since, February 24th, 2014, From New Jersey, United States.

Created on Jun 12th 2020 02:05. Viewed 555 times.

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