Filing your business taxes provides the IRS with important information regarding your company’s total costs, income, and any tax deductions you’re claiming from the previous year. If you give the IRS reason to believe that you cheated in filing your business returns, they might decide to commit resources just to ensure that you reported accurately. Receiving an IRS tax audit request can be an absolute nightmare without adequate preparation.
A tax audit can be incredibly hectic, especially for you as a small business owner, considering that you don’t have the resources necessary to hire a qualified accountant. With all the numerous deductions and forms involved in filing tax returns, you can easily miss the small details or miscalculate your cash flow. While there is no straightforward way to be completely insulated from possible tax audits, working with expert tax accountants from Pherrus Financial can help streamline your accounting tasks and minimize your tax burden. To reduce your chances of having to face the IRS, follow the best practices outlined here:
1. Double-Check Your Numbers
Any income tax form you receive is also reported to the IRS. The IRS expects the numbers you submit in your tax return statement to correspond with information obtained from third parties. If there are any conflicting details, the IRS could issue you a notice to correct the errors, or they could choose to audit your returns.
If your tax return numbers don’t add up, it will attract a lot of unwanted attention from the regulators. Since some mistakes easily go unnoticed, remember to double-check any math and information put forward as part of your tax returns. Consider hiring an accountant to prepare your returns or use tax preparation software to help ease the process.
2. Report Income and Expenses Accurately
You’ll significantly increase your chances of being audited if you maintain all your business expenses and income in a corporate bank account while retaining all your business expense receipts. This would go a long way in simplifying your tax return preparation and will be solid support for your returns if you were to be audited. In contrast, you’ll significantly increase your chances of being audited if you try overstating your expenses or hiding your income. While it’s okay to round off numbers, rounding to tens or maybe hundreds of dollars can indicate to the IRS that you’re cooking things up.
3. Don’t Mix Personal And Business Deductions
The IRS is often keen to spot small business owners trying to include non-business-related deductions such as entertainment, travel, merchandise, cell phones, or other costs. Always remember that only business expenses are allowed to be deducted. Ensure you understand what percentage of business entertainment expenses is valid as deductibles. For instance, taking your personal vehicle mileage as deductions is a common cause of IRS audits for small business owners.
The bottom line is that if your operations are honest and your records are beyond reasonably accurate, you have nothing to worry about. However, it’s always wise to remain prepared for an audit since you don’t want to waste precious time talking to the taxman when you don’t need to. Maintain business records for at least three years, including expenses and income. If you are unsure about anything, don’t hesitate to seek the assistance of a professional accountant.