Taxes for Entrepreneurs Limiting Your Audit Risk

Posted by Pierre de la Fortune on August 11, 2015 @ 12:01 a.m.

Written by Duncan Connor

You can never eliminate that chance of being audited, because a perfect tax return will be suspicious, too (who files perfect taxes?) has ten ways to reduce your risk of an audit we figure that most small businesses dont have big accounts in the Caymans or Switzerland, and that if youre reading this you havent run into significant tax problems in the past. Otherwise you'd know this stuff already.

1. Make your business a business, not a hobby. If you are in your third year of business and reporting a third year of losses, thats going to raise a red flag with the Internal Revenue Service. Despite what you might think, the IRS isnt evil, and if you show them the evidence, theyll understand that youre a loss-making small business -- for a while. If youre in year four and still making a loss, expect a call from the IRS about when you plan to start earning money.

2. Report your income accurately. If a client pays you $3250 for a service you provide, and you round that down to $3000 while your client reports the actual number, thats a red flag, too. It tells the IRS that youre not keeping accurate records -- and they do cross-check that stuff.

3. If you use a CPA or tax preparer, understand what theyre doing and why. If youre uncomfortable with something, ask them to explain it till you are comfortable or they do it your way (as long as its legal.) Why would you do that? You do it because youre responsible for the accuracy of your companys tax return, even if someone else prepares it -- and that means that you, not your preparer, will be liable for any additional taxes, interest charges, and penalties if you get audited. If your tax preparer promises to save you a huge amount of money, dont trust it. The only way to save huge amounts is to cheat.

4. Prepare to be audited from the first of the year to the last. If you keep your receipts, journal your expenses and mileage as they are incurred, and keep accurate records of your income, youll be able to show that youre not guessing at your numbers. Show the IRS auditor that you cant get the easy stuff right and youre just inviting a more thorough examination of your finances. Mark Green, IRS Spokesperson for Georgia, told that keeping good records of expenses as you incur them is a must for all businesses.

5. Pay estimated taxes if youre a sole proprietor or independent contractor. Pay them on time, and keep them current. Green said.

6. Dont ignore notices from the IRS. If the Feds are trying to get your attention, answer them while its still a polite cough. If theyve to come to your door already, youre in trouble.

7. The IRS publishes a dirty dozen (yes, its called that, you can Google it) list of the top 12 tax scams that theyre going to be looking for on tax returns. Do yourself a favor -- make sure you havent involved yourself in any of them. If you have, be prepared to admit it and face the possibility of an audit and penalties. You cant get out of paying taxes. No way, no how.

8. Your business has employees, and youve been withholding taxes from their paychecks to pay the IRS. Its been a tight month and you have bills to pay, so you think you might just borrow from the withheld taxes and pay it back next month. And then you do it again a month later. And again. Before you know it, youve borrowed all the taxes you were supposed to send to the Feds, and youre still not earning enough to pay it back. DO NOT borrow from the taxes your employees have been paying, no matter how tempting it may be. It can get your business levied out of existence.

9. The IRS isnt stupid. It has a pretty good idea of what a reasonable range of dollars for your business taxable deductions should be. If your company earned income in the lower end of the range and took tax deductions in the higher end of the range then see item #1. The IRS is happy for you to take business deductions but if you have a yard service and you want to buy a crop sprayer plane to put down Weed-B-Gon on your clients yards, youre probably going to get audited.

10. Dont try to claim credits youre not entitled to. Do you let your sales team drive around in commercial farm vehicles? If not, youre not entitled to the Fuel Tax Credit. And if you didnt hire any recently released felons, you need to look at other reasons to claim the WOTC for the additions you made to your workforce this year.

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