Small Business Audits

Editor’s Note: Here at Dispatches, we are always looking for ways to help our readers do things. For some of our readers, that means helping navigate the working world, for others, it means assisting in the ever challenging question, “what’s for dinner?” For still others, it means figuring out how to balance family life with everything else. In an effort to aid in all of these endeavors, we have collaborated on this article written specifically for our readers.

As a business owner trying to get a fledgling firm to grow and stabilize, your time and resources are going to be under a lot of strain as it is, so hearing the word “audit” can be enough to make your heart skip a beat! An IRS audit can be a serious strain on your business’s day to day productivity, so you need to do everything you can to reduce your chances of being caught up in one. In addition to consulting with a local accountant and tax attorney if necessary, here are a few general tips that might be red flags for your tax file. Of course, you should consult with an expert to review your specific situation. 

Reporting your Net Loss in More Than Two of Five Years
If your business isn’t able to satisfy at least three years of profits in a given five-year period, then the chances of you getting audited are going to be pretty high. Make sure you are aware of the IRS’s public guides for business expenses and are following it to the letter. This is an excellent reason to consult an accountant. 

Consistently Late Filings and Payments
If you fail to follow all the filing requirements that apply to your business and meet all the given deadlines for filing returns, you’ll not only trigger financial penalties but could risk all kinds of unwanted attention. If it doesn’t look like you’ll be able to meet a deadline, be sure to apply for an extension in plenty of time. Again, an accountant or tax attorney can assist you with this step.

Ridiculously High Salaries for Shareholders Who are Employees Too
When setting out salaries, make sure you take your time to determine what’s reasonable, based on the kind of business you’re running, the skill level of the people you employ, as well as more minor things like your geographic location. If you manage to overlook these details, you could easily end up needing the services of an I.R.S. lawyer.

Excessive Deductions for Non-Essential Things
Like any business owner, you’re can and should claim all the tax deductions possible. While some deductions are part of the routine, others will arouse suspicion. Excessive deductions for travel, business meals, events and entertainment will all be a red flag on your returns. Make sure you’re holding receipts for all of your expenses, keeping detailed records and not overstating anything in your returns.

Claiming 100 percent Business Use for a Vehicle
Many business owners use a car for both personal and business use. Not wanting to go to the trouble of keeping logs on all their trips, a lot of them will claim 100 percent business use for the vehicle throughout the year. As tempting as it may be to round it up, you need to be exceptionally careful when claiming travel expenses. Maintain detailed logs of your mileage, along with calendar entries for why you took each trip using the car.

Consulting with an account or a tax attorney is the easiest, most effective (and often most economical!) way to make sure you are filing your taxes correctly and on time. Ultimately, it is your responsibility as a business owner to make sure you are keeping receipts and details for your business expenses and profits.

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