How to Prevent an IRS Audit
IRS Audit.
How did you feel after reading those two words? A twinge of anxiety? A sprinkle of fear? Most people get a little nervous about the idea of the tax authority taking a closer look at their financials. But that nervousness can be even more acute for small business owners. After all, they often have most of their lives wrapped up in their companies, so an IRS tax audit could potentially upend their whole world. In fact, the word “audit” is so stained with fear that many new business owners don’t even know there are actually “good” audits.
There is no way to absolutely, positively guarantee that you won’t ever face an IRS audit. There are simply too many variables, and too many chances for human error.
However, you can significantly reduce your chances of being audited if you follow some common sense guidelines. And in a lot of cases, these best practices apply to individuals as well as small businesses.
How to Prevent an IRS Audit
File on time. Like we said, some of these tips are just going to be good common sense. Submitting your taxes late is one of the easiest ways to get noticed by the IRS. But filing on time might be difficult if you’re unable to pay. If you’re in this situation, it’s still better to file on time, as penalties and other consequences are far worse if you don’t.
Keep records. A big step toward avoiding an IRS audit is keeping electronic and/or paper records on hand for everything, including payroll records, previous tax filings, vendor agreements and receipts. As a general rule, you should keep previous returns and other tax documents for seven years; other business financial data should be kept indefinitely, as it can be useful outside of tax purposes, too.
Be tidy. Sloppy records are better than no records, but they’re hardly good. In fact, poor records can often lead to IRS audits. When you are filing your taxes, you need to present the IRS with an honest and accurate representation of your finances. So, do what you can to keep things neat – store physical records in organized drawers, and use accounting/bookkeeping software for as much of your business as you can.
No round numbers. This is in the same vein of providing an accurate, honest look at your financials. It’s extremely unusual for financials to come out to nice, round numbers, so the IRS will take a second look at figure that are conspicuously perfect. Obviously, if that’s how your numbers truly come out, there’s nothing you can do about it. But whatever you do, don’t round up or round down.
Deduct, but don’t be dishonest. Let’s be real here. If your business brings in $300,000 and you try to deduct $300,000 of that, you’re probably going to be subject to an IRS audit. But it’s not just great discrepancies that get noticed. The IRS has a system that determines roughly how much a company should deduct depending on varying levels of income. If you come out ahead of that, the IRS will probably inquire. So, again, be honest – take what’s legal and defendable. Your records should be able to justify any truthful deductions.
Make a profit (at some point). The number varies from year to year, but in general, only about 40% of small businesses are profitable, with the rest breaking even or actually operating at a loss. So having an unprofitable year or two is totally normal. Thing is, sometimes people use small businesses to cloak personal losses. Thus, if you’re constantly operating in the red year after year, the IRS might take notice.
Talk to us. Most small business owners simply don’t come from accounting and tax backgrounds, which means navigating the complex U.S. tax code probably isn’t their forte. That’s OK! That’s why tax pros exist – and that’s exactly where McManamon & Co. comes in. Our experts have decades of combined experience that they put to work across our varying business tax services, from “simpler” tasks, such as filing, to building out a yearlong tax strategy for your company.
McManamon & Co. is here for your small business tax, accounting and consulting needs. Call us at 440.892.8900 or contact us online today.
Tags: audit, small business, small business taxes, taxes | Posted in accounting, audits, McManamon & Co., small business, small business taxes, taxes