Tax season is beginning and your first quarterly taxes are just around the corner. As a business owner, taxes may be the last thing on your mind when it comes to daily operations, but sloppy filings only cause more problems down the line when the IRS decides to audit your taxes to ensure accuracy. Plus, there’s a three-year window for audits to occur, meaning you could be asked to verify information from up to four years ago!
Your chances of being audited vary based on what industry you’re in and your organization, but the risk of audits remains a stressful point for many business owners. However, knowing the potential triggers of an audit can help you avoid those mistakes in the future, as well as how to prepare for an audit if it happens. Believe it or not, an audit can be an excellent opportunity to make positive changes to your business!
Top 7 Reasons You May Get Audited
Though some businesses get audited simply through random selection or via an audit of partners and vendors, certain claims and mistakes on your filings can make your business more likely to face the IRS’s scrutiny.
- Disproportionate Deductions: Everyone likes deductions and credits when it comes to paying taxes, but claiming too many can raise eyebrows at the IRS. Especially if your deductions are significantly higher than previous years, the government will want to make sure your numbers are accurate. For most industries, restraint is required when claiming deductions on business vehicles, client meals, home office expenses, and similar categories. Talking to a tax professional about your deductions helps take the guesswork out of your taxes.
- Rounded Numbers: Though it’s common to want to round up when filling out your taxes, the IRS gets suspicious of a series of “obviously” rounded numbers, such as $50, $100, etc., simply because incomes and expenses usually aren’t that neat. Rounding a few cents or to the nearest dollar is acceptable, but not to the nearest 10 or 50.
- Math Errors: If numbers and math aren’t your strong suit, tax season can be an incredibly stressful time. The IRS is on the lookout for empty fields, rounding and math errors, and even consistent mistakes that may look like an attempt to avoid paying your full tax requirement. Before submitting your return, check all the details two or three times and make sure the document is signed!
- Cash Transactions & Tips: For some businesses, like salons, restaurants and bars, taxi services, and many more, cash transactions are much more common and face additional scrutiny due to the difficulty of tracking cash versus digital payments. If your business has a large amount of cash transactions, it’s a good idea to be able to verify your income and document transactions regularly. Plus, there’s an additional form to file if you receive a cash payment over $10,000, whether it’s paid all at once or in parts.
- Employee Classification: Businesses that rely on independent contractors may face increased scrutiny, especially if the IRS believes your employees are misclassified. Some businesses use the independent contractor classification to intentionally reduce their payroll, benefits, and business insurance costs. If you hire independent contractors, maintain thorough documentation of the work they perform for your business.
- Excessive Expenses: Keep excellent records if your business ever has an expensive year, whether you’re expanding and buying new equipment, paying for new certifications and training, or other legitimate reasons. Large expenses catch the IRS’s eye, especially if they’re dramatically different from your previous years’ filings.
- Self-Employed Business Owners with High Incomes: If you’re self-employed and classified as a Schedule C sole proprietor, your success often comes with a side of skepticism from the IRS. Your tax returns tend to be complex and leave room for a variety of errors, so the IRS will want to make sure everything is properly reported.
Steps to Take for Audit Preparation
Although it’s impossible to eliminate the risk of an audit completely, you can reduce your risks by keeping the main triggers in mind while filing out your forms. You can also take steps to prepare for the event your company is selected for an audit.
- Keep Accurate Records: Maintaining accurate financial records should already be an essential part of running your business, but it is particularly imperative in the event of an audit. In the event of an audit, you’ll need documentation such as receipts, invoices, and bank statements to support the information you’ve reported.
- Hire A Professional: An All About Businesses virtual bookkeeper can help take the stress out of your taxes! Our accounting services help you keep your financial information organized and accessible throughout the year, as well as help with tax preparation to reduce the risk of errors. We’ll also help you navigate the audit process, including answering questions about the information you need to provide the IRS.
- Respond Promptly: If you receive a notice from the IRS that you’re being audited, respond promptly. Having financial records organized helps you respond in a timely manner and protects you from late penalties and fees.
In addition to these tips, the IRS’s website offers several resources to ensure you understand the audit process. If the IRS finds inconsistencies in your tax return during an audit, it will issue a report outlining its conclusions. You’ll have the chance to respond to their assessment, either with corrections or proof that your original information was accurate. With organized information and bookkeeping, you can respond to audit notifications with confidence!
Audit-Proof Your Business Taxes with Us!
As a business owner, you have enough on your plate without adding the additional risk of tax problems and audits. At All About Businesses, we’re dedicated to helping you make the most of tax season without the added stress. From bookkeeping services and information organization to tax preparation and responding to audits, our virtual team is here to help with any financial management services you need!
An audit can serve as a tool for identifying areas where your business can improve. The results may highlight gaps in your financial management, such as record-keeping, compliance with tax laws, accuracy in reporting, or fraud prevention. By addressing these issues, your business can enhance its processes, reduce the risk of future audits, and improve efficiency. These changes can also help cut costs and boost profitability. Let All About Businesses help you stay on top of your finances and feel confident in the accuracy of your records — contact us today!
