15 Important Strategies That Will Help You Avoid a Business Audit
December 10, 2020 (Investorideas.com Newswire) When your business gets audited, it can be both mentally and financially draining. It's important to know how to avoid them, so you'll be able to save money and keep the financial future of your company protected. All it requires is conducting your business in a way that doesn't draw additional attention from the IRS. By keeping a good track of your records, you should be able to prevent your business from being audited. Here some key strategies for avoiding a business tax audit.
1. Pay your shareholder-employees a reasonable salary.
A small business that's incorporated as a C Corporation is able to report lower income, and thus, pay lower taxes by inflating the salaries of their executives and shareholder-employees. But then, if your business does this to an excessive degree, it's likely going to draw an audit from the IRS. You can avoid this problem by keeping all the salaries of your executives and shareholders at a level that's reasonable when compared to the rest of your industry. Research companies that are in a similar business and have a similar size to yours. Review the company's financial statements and find out what their executives get paid. You should keep your company's salaries within a similar range.
2. Limit the number of independent contractors employed.
The IRS is aware that a high ratio of independent contractors to full-time employees can be a technique that businesses use to avoid payroll taxes. Ensure that you stay within the IRS guidelines regarding the use and classification of independent contractors. The IRS defines an independent contractor as an individual who has the autonomy to decide the specific work that has to be done and the way in which it shall get done. You can visit the IRS website to get more information about independent contractors. If you're still not sure as to whether an individual is an employee or an independent contractor, you can file Form SS-8, Determination of Worker Status. Once you file it, the IRS reviews the information you've submitted and sends you a formal decision about the classification. You can find Form SS-8 on the IRS website.
3. Be careful with withholding taxes and withholdings.
When a business has employees, it must keep accurate records, withhold certain amounts, and make periodic payments to the IRS. Failure to do this can potentially subject your business to an audit. It's your responsibility to withhold taxes to cover social security taxes, Medicare taxes, and federal income tax. If you're unsure of what the employee withholding requirements are, read through IRS Publication 15, which is the "Employer's Tax Guide," and Publication 15-A, which is the "Employer's Supplemental Tax Guide." Both of these can be found on the IRS website.
4. Keep business and personal expenses separate.
In particular, if your business isn't separately incorporated, you need to be extra careful to make sure your business and personal records are completely separate. You'll have to provide separate and thorough documentation for all expenses you claim personally or for your business. There's nothing wrong with claiming both personal deductions and business expenses, as you're entitled to do this. But then, you have to be aware that a small business owner is going to be given closer scrutiny, particularly for deductions and expenses.
5. Keep personal and business bank accounts separate.
Your business should always have its own separate bank account. That account needs to be exclusively used for the operation of your business. By the end of the year, it will be easy to obtain a statement of the account that will demonstrate the expenses and income of your business. Keeping a separate account for personal funds will make it easier for any salary you take from the business to be clearly defined and identifiable.
6. Limit your home office use.
If you claim a deduction for using a home office, it's likely going to trigger an audit. Keeping your office at work will limit your chances of getting a business audit. You should only have a home office if it's necessary. If you're going to have one and plan to claim a deduction for it, you need to be sure the space you use for it is exclusively for business purposes and not for any other activities.
7. Avoid having extended business losses.
It's a goal of all businesses to avoid losses when possible. However, if you claim business losses as deductions after two years, it can trigger an audit. Keep your business operations consistently profitable to avoid your business being audited. Unfortunately, some businesses do end up in situations where they continue to lose money and have to claim a deduction for the loss. If that ends up being the case for your company, make sure you keep detailed records to file with your return. The better your records, the more likely you'll avoid an audit.
8. Maintain consistent accounting methods.
With accounting, there are two primary methods that exist for bookkeeping. There's the cash method and the accrual method. Both approaches are valid, and neither is more likely to draw an audit than the other. Nonetheless, if you end up confusing the two and use some of each method in your record-keeping, it will make your records appear confusing and possibly even deceitful. As a result, your business will likely get audited. You need to choose one method and stick to it.
9. Make reasonable charitable donations and have supporting documentation.
If your business makes charitable donations, but they appear excessively large, you'll end up catching the attention of the IRS and potentially draw an audit. When donations are genuine, you do have the choice to claim a deduction. However, in this case, you should be sure that you have all the mandatory supporting documentation to file with your tax return. If your business makes a donation that exceeds $250, you'll need to have receipts from the recipient. If your business makes a donation that exceeds $500, you'll have to file IRS Form 8283. When you submit the receipts and tax form with your tax return, you can avoid your business getting audited.
10. Retain your business expense receipts.
Your business should have a system established for receiving and retaining copies of every expense receipt. By saving the receipts, you'll be in a better position to prepare your business tax returns at the end of the year. All the receipts may not need to be submitted with the return, but it's good to have them in case they're needed. You should only claim deductions for expenses you'll be able to prove. Your tax return will be fully supported by retaining the receipts for all expenses.
11. Carefully review your figures against all tax records.
When you're preparing a tax return, the figures that are reported must match the documentation that's being submitted to the IRS. That will include any 1099s, W-2s, and any other reports that might go from a third party, such as supplier or bands, to the IRS to report your income. Any discrepancies or mistakes made in reporting will likely trigger an audit.
12. Appropriately record all numbers.
The IRS advises that you can round the numbers in your business tax return to the nearest dollar. Don't round it any more than that. If numbers that are rounded to the nearest ten dollars or hundred dollars are submitted, the IRS will probably question where those numbers are accurate and audit your business.
13. File tax returns on time.
If you file your returns late, you can increase the likelihood of drawing attention to your business and getting audited. Always file your returns on time. If you're unsure you'll be able to file on time, file the appropriate paperwork to get an extension, and then submit a partial payment of the estimated amount. If you expect that your business is going to owe more than $500 in taxes for the year, you'll be required to pay quarterly taxes. Failure to pay quarterly taxes will subject you to tax penalties and potentially cause you to be audited for the entire year.
14. Sign everything.
It may seem simple, but forgetting to sign any of the attached schedules or your tax return can trigger an audit. If this is missing, the IRS is required to review your full return more closely. Additionally, you should always double-check the accuracy of your calculations and form completion before you submit your form.
15. Consider a professional for your business taxes.
You may believe you're competent enough to prepare the tax return, but choosing to get a professional to do it could be a smart business expense. Tax professionals can thoroughly review all of your receipts and other records to be sure they're documented appropriately. They have the knowledge and experience to help you with avoiding an audit of your business. If you're interested in knowing more about using a tax professional to handle your business taxes, you can find more information at this link: taxfyle.com/tax-preparation-outsourcing.
It can be a challenging time whenever a business gets audited. It's best to do as much as you can to avoid that happening. Keep these 15 strategies in mind to help give your business the best chance of not getting audited.
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