Just the words "IRS audit" are enough to make most people roll their eyes or groan in pure agony. More specifically, business owners in particular often fear being audited by the IRS. That said, there are numerous steps people can take when they are eager to mitigate the risks of being audited. Even though there is no foolproof way to ensure your business does not get audited by the IRS, there are certain steps you can take to minimize the likelihood of receiving a business-related audit.
Track and record everything that you spend or receive throughout the year Pay attention to your cash flow, expenses and charitable giving. Make sure you store the information in one place, but keep personal and business expenses separate. This task is easier than ever before, thanks to technology. For example, QuickBooks is a popular small-business accounting platform that tracks income, expenses and inventory. It also has a payroll function. Other platform options include Expensify, Certify and Zoho Expense, to name a few. The costs and specific capabilities of your options will vary, so as always, make sure you do your research before selecting a specific option as an investment. If digital options are not preferable for you, feel free to hire a bookkeeper instead. Be as specific as possible when filling out your tax return Instead of combining all your expenses together, separate them into categories, like travel or advertising. From there, include supporting documentation for large expenses and expenses that differ dramatically year over year, simply so that the IRS has something to reference if the values you're reporting vary greatly. If anything, including extra documentation will only serve you well. Understand the difference between a business and a hobby According to the IRS, hobbies are activities that people pursue simply because they enjoy doing them without having any intentions of making a profit. People who operate a business differ in that they do so with the intention of making money. Many people, however, engage in hobbies that eventually turn into a source of income, at which point they are no longer hobbies. While there are other details that are considered criteria measuring the distinction between businesses and hobbies, the general rule of thumb is that businesses have a net annual gain while hobbies yield no profits at all. Ensure your deducted business expenses meet IRS requirements Tax professionals can assist you in the process of determining what does and does not qualify as a deductible expense. That said, in general, charitable donations are not a deductible business expense in instances where you are the sole proprietor who is reporting your business income via a Schedule C form. Make sure the information on all your returns matches Recognize that it is a major red flag for the IRS if the information you provide on various forms does not match from one form to the next. For instance, if what you state on Form 1099-INT does not match the information on Form 1099-DIV or Form 1099-NEC, then your information will pique the interest of the IRS in a way that may result in an audit. Like we said, you cannot evade an IRS audit with full certainty. Sometimes, the outcome is simply unknown no matter what you do. However, following these guidelines will certainly reduce your chances of being audited. That said, if your business is selected for an audit, the IRS will send you a notice in the mail via the U.S. Postal Service to your last known address. Make note that a notice will never be sent to you by phone, via email or on social media, so never respond to messages in those instances. But do make sure you respond to an audit notice, as it is a requirement that it not go unanswered. Comments are closed.
|
Newsletter articles are posted every 2 weeks. If you would like to have our e-newsletter delivered directly to your inbox, please sign up. Your information is confidential; you can unsubscribe at any time. Subscribe. Categories
All
|