Small business owners have a lot on their plates to take care of. They multitask with various business operations like sales, customer services, HR, marketing, bookkeeping, and more. Tax season can make everything complicated and filing an inaccurate tax return can trigger an audit.
IRS audits can be a huge headache, especially for small business owners. When big companies have their own legal and financial team to handle such scenarios, most business owners have limited knowledge to deal with an audit and often seek professional help. Here is what you need to know about an IRS audit and how to avoid an audit for your small business.
What is an IRS Audit?
In simpler terms, it is an audit performed by the IRS that examines the financial information of a company or a person to ensure they’re reporting all the information correctly and paying the right amount of taxes. They also verify the information that you’ve shared meets compliance with the US tax laws and regulations. During the audit, IRS looks into taxable income, losses, expenses, and deductions.
There are mainly two types of IRS audits out there; Correspondence audits and in-person audits. Corresponding audits are when you’re asked for additional information via mail. Whereas, an in-person audit is much more complex. It occurs in your house or your office. You will have to face interrogation and provide them with all the supporting documents that need clarification.
How to avoid an IRS audit?
These are the common mistakes that you might make that can trigger an audit. Make sure you don’t make these errors while filing your taxes.
- Late filing
Late filing is one of the major red flags that can trigger an audit. You might need to pay penalty fees but the chances of provoking scrutiny are high when you file late. So don’t wait until the last minute and file early to avoid this mistake.
- Errors while filing
Business owners who do bookkeeping on their own should take immense care in maintaining accurate data. Mathematical errors can be fixed easily but if left unnoticed, you might face an audit. Also, make sure you sign your tax return before filing.
- Reporting Multiple Losses
If you report multiple net losses within five years (more than two in most cases), you are most likely to face an audit. You shouldn’t file excessive deductions and ensure your reported income is accurate. IRS would want to know why you keep losing money from your business.
- Filing Excessive deduction.
You will be filing for various types of deductions like home office deductions, travel deductions, dining deductions, and so on. Your expenses should not look unusual where you would be spending a lot and claiming for deductions. Also, make sure all your deductions are backed up by receipts and other supporting documents.
- Round numbers
Having a round number in your tax forms is highly unlikely. You should provide accurate numbers while filing for taxes. Report the exact amount to avoid a visit from the IRS. Investing in a good bookkeeper will help you file accurate taxes.
- Not responding to an IRS notice
If you receive a notice from the IRS or request additional information, you need to take the necessary actions as soon as possible. Not taking the IRS notice seriously can get you in lots of trouble. If you don’t respond, The IRS assumes worst-case scenarios and you might have to face those consequences.
Do you file your own taxes? Do you miss your tax deadline? Do you worry about getting an IRS notice? We are here to help you out! We will help you file your taxes early so you won’t have any trouble. Our experienced accountants make sure there are no errors so you won’t have to worry about IRS audits.
Reach out to us now.