We all have to pay taxes, whether we like it or not. To ensure your business is paying its fair share, the IRS audits about 1% of all tax returns every year. There are plenty of reasons to avoid that audit, even if everything your business reports is above board. The time and attention that it takes to go through an audit can be expensive enough, and many business owners can be tripped up by small, inadvertent mistakes that end up costing them dearly. What do you do to avoid the audit?
Don’t File Sloppy Tax Returns
If you’re filing your own taxes, then you can’t afford to get lazy or hasty with it. Even small mistakes, like missing information, can trigger an audit. Mathematical errors are a major red flag for the IRS, as well. Ensure you take the time to prepare your returns early so you have plenty of space to look over everything again and to re-do the math to make it as accurate as possible.
Watch Those Expenses
If you’re reporting your expenses in enough detail, you can expect an audit for that, as well. If you have any unusual expense claims (for instance, if you don’t normally travel for business but have a year that’s full of travel expenses), you have to fully substantiate them. Apps like Expensify can make it easy to capture and store expense records like receipts at the click of a button. Be careful of your expenses in comparison to your returns, too. If you have high expenses during multiple years of reporting losses, that’s another big red flag. Also, watch your income. The extra supplemental income can impact your total tax return.
Rely On The Experts
Having no strategy behind your tax returns could be a mistake that results in an audit. Accountants like Brown Smith Wallace, LLP or other large accounting firms can help you do the due diligence in ensuring that your returns are comprehensive and correct. However, accountants are also legal advisors that can help you devise a tax strategy. For instance, you can try to maximize tax deductions as much as possible, but you can also form a more conservative approach that balances the deduction claims so that you don’t attract the attention of the IRS. Depending on any potential red flags already lurking and the business’s overall financial standing, your accountant can advise you on the best direction to take your returns.
Keep Pristine Records
If you are required to provide records after you have submitted your tax return, it’s your last chance to avoid a full audit. For that reason, using software like FreshBooks or Quickbooks can be truly essential. It makes it much easier to complete and store different accounting records. You need up to 18 months of records, but it’s safer to keep them year-on-year for as long as possible. That way, even if you do get hit by an audit, you’re more likely to come out of it intact.
Knowing the red flags and using the expertise on hand is crucial if you don’t want your business to be targeted by an audit. Spend the time and money you need to when getting your tax filing strategy up to scratch.
Also watch your supplemental income to know how it impacts your taxes.