Taxes for Entrepreneurs: Limiting Your Audit Risk

You can never eliminate that chance of being audited, because a perfect tax return will be suspicious, too (who files perfect taxes?) has ten ways to reduce your risk of an audit – we figure that most small businesses don’t have big accounts in the Caymans or Switzerland, and that if you’re reading this you haven’t run into significant tax problems in the past. Otherwise you’d know this stuff already. 

1.Make your business a business, not a hobby. If you are in your third year of business and reporting a third year of losses, that’s going to raise a red flag with the Internal Revenue Service. Despite what you might think, the IRS isn’t evil, and if you show them the evidence, they’ll understand that you’re a loss-making small business — for a while. If you’re in year four and still making a loss, expect a call from the IRS about when you plan to start earning money.

2.Report your income accurately. If a client pays you $3250 for a service you provide, and you round that down to $3000 while your client reports the actual number, that’s a red flag, too. It tells the IRS that you’re not keeping accurate records — and they do cross-check that stuff.

3.If you use a CPA or tax preparer, understand what they’re doing and why. If you’re uncomfortable with something, ask them to explain it till you are comfortable or they do it your way (as long as it’s legal.) Why would you do that? You do it because you’re responsible for the accuracy of your company’s tax return, even if someone else prepares it — and that means that you, not your preparer, will be liable for any additional taxes, interest charges, and penalties if you get audited. If your tax preparer promises to save you a huge amount of money, don’t trust it. The only way to save huge amounts is to cheat.

4.Prepare to be audited from the first of the year to the last. If you keep your receipts, journal your expenses and mileage as they are incurred, and keep accurate records of your income, you’ll be able to show that you’re not guessing at your numbers. Show the IRS auditor that you can’t get the easy stuff right and you’re just inviting a more thorough examination of your finances. Mark Green, IRS Spokesperson for Georgia, told that keeping good records of expenses as you incur them is “a must” for all businesses.

5.“Pay estimated taxes if you’re a sole proprietor or independent contractor. Pay them on time, and keep them current.” Green said.

6.Don’t ignore notices from the IRS. If the Feds are trying to get your attention, answer them while it’s still a polite cough. If they’ve to come to your door already, you’re in trouble.

7.The IRS publishes a “dirty dozen” (yes, it’s called that, you can Google it) list of the top 12 tax scams that they’re going to be looking for on tax returns. Do yourself a favor — make sure you haven’t involved yourself in any of them. If you have, be prepared to admit it and face the possibility of an audit and penalties. You can’t get out of paying taxes. No way, no how.

8.Your business has employees, and you’ve been withholding taxes from their paychecks to pay the IRS. It’s been a tight month and you have bills to pay, so you think you might just borrow from the withheld taxes and pay it back next month. And then you do it again a month later. And again. Before you know it, you’ve borrowed all the taxes you were supposed to send to the Feds, and you’re still not earning enough to pay it back. DO NOT borrow from the taxes your employees have been paying, no matter how tempting it may be. It can get your business levied out of existence.

9.The IRS isn’t stupid. It has a pretty good idea of what a reasonable range of dollars for your business’ taxable deductions should be. If your company earned income in the lower end of the range and took tax deductions in the higher end of the range … then see item #1. The IRS is happy for you to take business deductions but if you have a yard service and you want to buy a crop sprayer plane to put down Weed-B-Gon on your clients’ yards, you’re probably going to get audited.

10.Don’t try to claim credits you’re not entitled to. Do you let your sales team drive around in commercial farm vehicles? If not, you’re not entitled to the Fuel Tax Credit. And if you didn’t hire any recently released felons, you need to look at other reasons to claim the WOTC for the additions you made to your workforce this year.

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