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Avoiding a Small Business Audit

No one wants to go through an audit. They’re often long and stressful, and there’s talk of increasing IRS funding and audits. However, the IRS only has so many resources, and thus targets certain individuals and businesses based on specific factors. Working with a professional can help you maintain clean books and reduce your chances of being audited.

What Is An Audit?

An IRS audit is an investigation of your business and/or personal finances. They are double checking that what you’ve reported is accurate. They will request evidence that supports your income and deductions, such as invoices, receipts, and more.

Report All Of Your Income

Underreported income is a common reason for audit investigation. Be aware that copies of certain forms you receive, such as W-2’s and 1099’s, are sent directly to the IRS.

It’s easy for the IRS to see this underreported income. They already have the numbers in their system, and automatically compare it to what you report on your tax returns. If you report less you’re going to get a notice.

Be Careful With Expense Categorization

Mixing business and personal expenses is another common reason for audit investigation. The simple answer: don’t do it. However, we realize, as does the IRS, that many small businesses do mix these expenses, whether intentionally or not.

This is bad for two main reasons: one, those personal expenses are not deductible, and the audit will disallow them. This increases your taxable income and results in more tax to pay, along with penalties and interest. The second reason is that mixing business and personal expenses can pierce the corporate veil. This means that the protection you thought you had establishing a Limited Liability Company or some other business entity may no longer apply. The things you thought you were separating and protecting may now be subject to seizure by the IRS, such as your house.

Working with a pro can really help here. Just because you accidentally charged that personal item to the company card doesn’t mean it’s set in stone. Whether it’s monthly accounting, consulting, or annual tax preparation, the pros can help you remove those nondeductible expenses, and report clean, accurate numbers to the IRS.

Don’t Push The Envelope

The IRS definition for a deductible business expense uses the terms Ordinary and Necessary. Ordinary means common for your industry. Necessary means helpful to your specific company. The IRS has an unbelievable amount of data, allowing them to analyze anything from industry trends to averages on each specific line of a tax form. Pushing the envelope with deductions may draw attention, such as claiming automobile deductions twice as high as your industry average, or consistently reporting losses.

Another area to watch out for is meals and entertainment. The new rules eliminate any deduction for entertainment, and split meals between 50% and 100% deductible depending on the circumstances. Taking clients out to concerts, sporting events, and more may not qualify as the deduction you think it does, and draw unwanted attention to your return at the same time.

Stay On Top Of Employment Taxes

Nothing shuts a business down faster. Failure to remit payroll taxes will result in immediate notices, which quickly escalate to liens on your accounts. They’ll pull the money from wherever they can and bankrupt you before you even see a notice that you’re under audit.

When money gets tight, don’t even consider payroll taxes as an option to skimp on. Get a bank loan, max out your lines of credit, use personal loans, sell things, do whatever you have to, but don’t fail to remit payroll taxes.

 Work With A Tax Pro

Tax pros can help you avoid audits by following the right rules the right way. Unless you’re reading tax and accounting news every day you’re missing out on the latest rules and law changes. Gain greater insight by working with a tax pro to both comply and optimize the ever-changing rules.

Tax pros can also help with the rules that haven’t changed, helping you better understand the definitions and boundaries so that you can maximize every deduction allowed.

Lastly, you’ll want a tax pro on your side if you do get audited. Going through an audit unassisted could lead to a bad result simply because you don’t understand the terms, don’t know how to provide what they request, or don’t know how to fight back against their initial findings.

Working with Haworth & Company, Ltd.

We strive to be those tax pros you know and trust, with over 30 years of experience helping people just like you in the Twin Cities metro and surrounding areas. We’ll help you address the above issues and more so that your business runs smoothly and your books are clean. In addition, we offer an optional audit protection package to give you peace of mind that should you be randomly audited we’ll be there to help for a fraction of the cost. Check out our services page to learn more, and contact us when you’re ready to build a relationship and start something new.


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