During tax season, it can feel like you’re sitting on a ticking time bomb as a small business owner. Are you going to be audited this year? When? How? WHY?!
However, while the IRS does review some tax returns at random, the vast majority of audits are conducted in response to an error or discrepancy — and, believe it or not, the percentage of tax returns that are audited is surprisingly low. Still, we don’t want you to be one of the few. You can avoid an audit by carefully filing your taxes and avoiding red flags.
We’ll go over 12 tips for avoiding a tax audit so you can file your taxes with confidence.
12 Ways to Avoid Getting An Audit from the IRS
Here are your best chances for avoiding an IRS audit:
1. Don’t forget to file your tax return.
You may believe that if you had no income or owed no taxes during the tax year, you do not need to file a return. That is incorrect, because the IRS may contact and question you if you do not file a tax return for any reason. If you have no income or no taxes to pay, you must still file a return explaining why you have no income and/or demonstrating that you have no taxes to pay.
2. Don’t use a shady tax preparer.
Next, don’t expect most tax preparers to do an excellent job for you. If your preparer makes errors, you can be audited.
Even experienced tax preparers can make mistakes, and some may break the law while attempting to reduce your taxes, while others may even steal from you. But don’t let that deter you from hiring a skilled tax professional; good ones will know far more about the tax code than you do and can save you far more than they’ll bill you. Just keep in mind that you are ultimately responsible for your tax return.
3. Don’t forget to sign.
This is another tiny detail that is all too easy to overlook. Failure to sign your name on your return may result in an audit. You may simply prevent this problem by using tax software, which guides you through the process of preparing and filing your tax return step by step.
4. Check the math on all tax forms twice.
When it comes to the totals on your tax forms, double-check (or even triple-check) your calculations. The IRS frequently examines tax returns that have math problems or form issues.
Remember: Even if you engage a professional accountant or tax expert, you should always double-check their work. Before submitting your tax return, double-check that all of the figures are right and consistent.
5. Do not disclose a zero income.
If you have no income and file a tax return stating such, you are doing the proper thing; yet, your chances of being audited are higher than those who report income. Why?
For instance, if you’re self-employed and report a net loss for the year, the IRS may want to double-check to ensure you’re not pulling a quick one. About 3.25 percent of returns with no adjusted gross income were audited in 2016.
6. Caution is advised when using Schedule Cs.
If you are a self-employed taxpayer, you are probably familiar with Schedule C. Unfortunately, the IRS scrutinizes Schedule Cs very closely. That implies you should take extra precautions when making yours.
If you don’t want to face this work on your own, the IRS has materials to help you fill out yours appropriately. You can also hire an accountant or tax professional if you don’t want to do it yourself.
7. Consider using payroll software.
Payroll errors can potentially result in an IRS audit. The IRS will raise a red flag if there is even a minor difference between tax withholding and payments.
Using payroll software is the easiest approach to prevent this problem entirely. Aside from assisting you in avoiding costly errors, there are several other advantages of adopting payroll software, which include:
- Additional security features
- Payroll outsourcing may be less expensive.
- Allows you to devote more time to other elements of your business.
- Payroll records are easily accessible.
- Other functions such as time monitoring, personnel administration, and expenditure tracking may be included.
8. Don’t leave anything out.
If you fail to record any income or omit any other information, this is another red flag for the IRS. Even if it’s only a small dividend payment that you don’t want to disclose, it must be included — not only because it’s the correct thing to do, but also because the IRS is likely already aware of it and will ask why you haven’t mentioned it.
Entities that pay you normally record these payments to the IRS, whether they are salary payments, dividend income, interest payments, or something else. The IRS then wants you to include all of these payments on your tax return.
9. Employ an accountant.
The most important piece of advice in this list for small business owners is to employ an accountant or tax professional to file your taxes. Not only will this enhance the likelihood that your tax return is proper, but it will also increase your chances of maximizing your tax deductions. When it comes to taxes, the cost of peace of mind is well worth it.
10. Maintain thorough business records.
Our final piece of advice is to maintain precise, well-organized records. There is no surefire strategy to avoid a tax audit. If you are audited, the process will go much more smoothly and quickly if all of your data are easily accessible and well-organized.
If you are audited, the IRS may require the following:
- Checks that were canceled
- Papers for tax preparation or guidance
- Documents pertaining to property acquisition
- Loan contracts
- Tickets for travel
- Employment documentation
Accounting software might be of great assistance in this area. Most systems allow you to keep track of bills, generate reports, and attach receipts to costs. Some solutions additionally include an audit trail report, which displays all activity on your company account.
Avoid the Red Flags and You’ll Dodge an IRS Audit
If you are organized and keep good records, you should be able to readily defend yourself to the IRS in the event of an audit. But, perhaps, the ten suggestions listed above will keep you from ever being in that situation.
Do you want to learn more on how to effectively file your taxes while saving money? Check out Today CFO’s eBook on the Biggest Legal Tax Loopholes For Dentists and Other Professionals In The New Tax Law.