In recent years, the IRS has been targeting an increasing number of small businesses for tax audits. These can result in significant penalties. However, there are certain strategies that can help small businesses avoid IRS audits.
Here are seven tax tips that can be leveraged by small business owners who want to limit their risks of being the subject of IRS tax audits:
- A reliable record-keeping system
Avoiding a IRS tax audit starts with obtaining and maintaining adequate business information. This is why it’s important to pick a reliable record-keeping system, such as Quickbooks or Xero, and to inquire about the type of documentation needed to avoid tax audits. Having the adequate processes in place to gather and keep any necessary tax-related documentation can limit a business’s exposure to IRS audits.
- A valid accounting method
Small businesses must peruse one of two methods of accounting: either cash or accrual. Determining the appropriate method of accounting for any small business involves understanding the business’s nature, as well as its legal structure.
- Stay current and be sure to file any past due returns
Past due returns put a small business at increased risk of being audited by the IRS. Small business owners should ensure that any past due returns are addressed and filed as soon as possible.
- Discuss unusual circumstances with a tax professional
Discuss any unusual personal or business-related circumstances with a professional. They will know how to treat it and how to report it.
- Accurate business income reporting
Many, if not most, IRS tax audits are triggered by inaccurate business income reporting. The most effective way to report accurate small business income is to obtain and maintain records of all income obtained.
- Adequate tax return review
Small business tax returns can include certain levels of complexity. In order to avoid any last-minute errors, it’s important to allow for a careful review of the return. This can be better done by enlisting the assistance of a tax professional.
- Professional advice
Seeking the help of a professional can be a powerful way to limit the business’s exposure to IRS tax audits, as they can help business owners avoid common tax pitfalls. Tax professionals can also help in case a tax audit does occur.
While being affected by a tax audit as a small business owner is a possibility, there are many ways to avoid or resolve it. Keeping these tips in mind will go a long way in preventing challenging tax situations for most businesses.
The Balance Sheet is a bookkeeping and accounting services firm located in West Palm Beach, Florida. It was created by Maxine Taylor out of a need to help her clients make better projections and financial decisions for their businesses.
- “Avoiding Problems.” Internal Revenue Service. Accessed January 08, 2018. https://www.irs.gov/businesses/small-businesses-self-employed/avoiding-problems.
- “Six Tips to Avoid an IRS Audit.” Six Tips to Avoid an IRS Audit | NAEA. February 12, 2013. Accessed January 08, 2018. https://www.naea.org/newsroom/press-releases/six-tips-avoid-irs-audit.
- “Visit the IRS Small Business Tax Center for All Your Tax Needs2 | Internal Revenue Service.” 2 | Internal Revenue Service. Accessed January 08, 2018. https://www.irs.gov/newsroom/visit-the-irs-small-business-tax-center-for-all-your-tax-needs2.
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