5 Ways for Business Owners to Avoid a Tax Audit
One thing small business owners tend to fear is an IRS tax audit. Just the mention of the word audit is enough to make some get a little sweaty and start to think of the worst-case scenario. Maybe the business doesn't have all the numbers quite up to date, or maybe someone overshot mileage estimates, or maybe it's just the fear of the unknown. Either way, getting an audit letter in the mail can be frightening.
The good news is an audit is avoidable and we can help make sure this nightmare doesn't become a reality for your business. To that end, we've put our heads together to come up of a list of important things small business owners should do to avoid a tax audit.
Put these five things into practice to help keep your business out of hot water:
1. Keep Good Records - We harp on this a lot, but it's true. Keeping good records and track of expenses, income, and sales is the first step. Keep business and personal expenses separate and know what your numbers mean. It will not only help avoid a tax audit, but it will also make filing your taxes at the end of the year easier.
2. Independent Contractors - As mentioned in our last blog, having an independent contractor or freelancer on the payroll is something that will catch the eye of the IRS. If you use a freelancer, make sure they are exactly that and that you're supporting documentation is up-to-date and accurate.
3. Take Appropriate Deductions - Things such as home offices and business expenses have a reputation of being a red flag for IRS auditors. Make sure the deductions you are taking are legitimate and can be verified with documentation. Taking a short cut might save you initially but it can end up costing you in the end.
4. Pay Quarterly Taxes - If your business owes more than $500 anually on taxes, you should be paying estimated taxes quarterly. Failing to do so can result in penalties and an increased risk for an audit. If the business is new and you arent' sure how much taxes will be owed, work with an accounting and bookkeeping firm such as Tally Services to help you estimate.
5. Be Honest - It can be tempting to find tax loopholes such as paying higher salaries to shareholders or deducting non-expensable items to lower the business's tax liability, but these strategies invite the attention of the IRS and potentially a tax audit.
By keeping track of your companies books, records, and subsequent tax filings in an orderly and honest manner, you'll be much less likely to be selected for an audit. And if an auditor comes knocking at your door, you'll have nothing to fear. Work with the Tally Services team of accounting and bookkeeping experts to ensure your business - big or small - is doing what it can to avoid and audit and prepared if one comes anyways. Contact us for more information!