Tax problems cause far too many small businesses to fail. The odds of being audited and getting hit with fines you can’t afford are greatest for small businesses that take in mostly cash. Yet there are steps you can take to minimize the risk of an audit and make the process as painless as possible if you are audited.
Here’s what businesses can do to stay out of trouble with the IRS.
Always File Your Tax Return on Time
Too many small businesses run into trouble because they don’t pay their taxes, though this can result in a failure to file a penalty. Unfortunately, the IRS assumes you’re embezzling money if you don’t even bother filing a tax return. You should file your tax return even if you can’t pay the bill. Then you can offer a compromise and set up a payment plan. Note that if you can’t pay your payroll taxes, it might be time to let some employees go.
Report All of Your Earnings
A small business owner may be audited if their business is audited and vice versa. You should be able to show how you support your lifestyle because you’re inviting an audit if you’re obviously spending more than you’re seemingly bringing in.
Industry analysis could show that your business income, expenses, and/or profitability are comparable to your industry as a whole. You can also reduce the risk of an audit with ratio analyses, showing that your expenses in a given year are comparable with other businesses in your industry.
Minimize Your Losses
A business must earn a profit in order to stay in business. While businesses may suffer losses once in a while, you invite scrutiny if you claim losses year after year, especially after the startup phase. You can also end up in the spotlight if you are claiming excessive expenses, whether or not they result in losses for the year. Furthermore, you’re at an increased risk of an audit if you end up getting a tax refund.
If you want more information about this, Advancepointcap.com has an informative article on how to deal with an audit. They run down the records that IRS auditors will want to review and spell out the audit process. They also explain what business owners periodically do that is likely to trigger an audit, so you can minimize the risk of being audited yourself.
Keep Your Business Accounts Separate from Your Personal Accounts
Keep your business transactions separate from your personal transactions. The best way to do this is to have separate accounts, and never use business accounts for personal expenses. This has several benefits. One is that it makes the audit easier since you only have to present one set of books. Then you only have to maintain one set of paperwork, and you won’t have to explain what various personal expenditures were for.
Choose a Tax Professional with Professional Training
One industry survey found that there are more than 400,000 people doing tax returns that don’t have any training in tax law. You can minimize your odds of problems with the IRS by hiring a tax professional who has extensive training in tax law. Any CPA or enrolled agent has more training than the average tax preparer, though you would be better off hiring a tax preparer that specializes in tax law.
You should take steps to minimize your risk of being audited, especially if you deal with a lot of cash. You must do what you can to improve your odds of surviving an audit if you want to stay in business.