5 Ways Small Businesses can Avoid an Audit

Here are some tips to consider regarding your taxes to help your business avoid a tax audit.According to LegalZoom.com, only about 1.5 percent of tax returns are audited every year, but for those individuals and businesses going through an audit, it can be a very stressful time. Here are some tips to consider regarding your taxes to help your business avoid a tax audit.

  • Report all of your business’s income. You are required to report all the income your business takes in from any and all sources. Regardless of the type of business you run, the IRS clearly defines what you must report on your tax return.
  • Double-check for math errors. Mistakes in the math on your tax returns will attract attention from the IRS. Check your figures carefully, and be sure to enter the correct amounts in the proper sections of the forms. If your numbers are wrong, the IRS may assume there are other errors as well.
  • Keep home offices for business only. If you claim a home business, be sure to keep your office space separate from your living space; don’t keep personal belongings in your office or use your office for socializing. No more than 20 percent of your home should be claimed as a home office.

Experts say that small-business owners, especially sole proprietors, have an increased risk of being audited because the IRS believes that self-employment incomes are largely underreported. Follow these additional tips to avoid an audit at your company:

  • Maintain consistent accounting practices. Most small businesses with sales below $5 million can choose to use one of two accounting methods: cash or accrual. These methods require different action when filing taxes, so it is important to understand the various guidelines. Be sure to seek IRS approval if you are considering switching your company’s accounting method.
  • Accurately report independent contractors versus employees. The IRS is on the watch for business owners who consider employees as independent contractors. Remember also that 1099s are required for contractors who gross $600 or more during the tax year.

If your business is selected for a tax audit by the IRS, you will be notified either by mail or by telephone, and you will receive a written request for specific documents. The IRS recommends keeping tax return records for three years from the date the return was filed to help in such a situation.

For more small-business tax information, you can visit www.irs.gov/businesses/ or stop by your financial institution’s local branch, where a professional can help answer any of your questions. By taking the proper precautions throughout the tax year, your business will be less likely to be selected for an audit, and if it is, you will be adequately prepared.


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