As a small business owner, you have enough on your plate already without worrying about how to defend yourself should the Internal Revenue Service (IRS) decide to audit your return. When the IRS audits someone, whether an individual taxpayer or a business owner, that person bears the burden of proof for whatever the IRS is questioning. The best way to avoid this situation entirely is not to take any actions that draw unwanted scrutiny from the IRS. Here are just four possibilities.
Filing Late Too Often
If you always get your business tax return in at the last minute or even file it late, the IRS will eventually notice. This could make you subject to late payment penalties and other financial sanctions. Filing in a timely manner is a better strategy for the IRS to not pay much attention to your return. It’s a good idea to file as early as possible anyway in case something comes up while preparing your return that you need more time to resolve.
Taking Too Many Business Deductions
Taking as many business exemptions as possible can be tempting, but you need to make sure that you’re eligible for any that you do decide to claim. For example, were you truly engaged in business functions every time you filled your car with gas or dined out with another person? Working with a Certified Public Accountant (CPA) for at least your first few years of filing business tax returns will help ensure that you’re not claiming anything that could trigger a business audit.
Excessive Use of Vehicle for Business Purposes
If you use the same vehicle for business and personal reasons, don’t attempt to claim that you only use it for business. This is one of the surest ways to trigger a business audit. Keep in mind that you need to select the standard mileage rate set by the IRS or your actual expenses, not both. You will need to document every trip you made in your vehicle if you attempt to claim that you used it 100 percent for business. We also recommend reviewing what qualifies as business use of your vehicle such as:
- Using your car to travel for a client meeting
- Driving to the post office to send out mail for your company
- Driving for research purposes
Using Primarily Cash for Your Business Transactions
Receiving business income and paying for business items mostly in cash is a common cause for a business audit because it can be difficult to keep records. If possible, plan to make purchases with a debit card or a credit card and then pay the balance in full each month. Although you may prefer cash, switching to plastic can help you avoid IRS scrutiny. If customers pay you in cash, be sure to keep detailed receipts and report all income.
The above highlights just some examples out of more than a dozen that can increase the likelihood you will experience a business audit. We are happy to sit down with you to review your return before submitting to determine if it raises any red flags you would not have considered.
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