While you might feel you have all of your bases covered in terms of operating your business, you may be shocked to learn you’re being audited by the IRS. Before you have a panic attack and run screaming down the streets, take out time to prepare yourself and understand just what the IRS is looking for when they audit your business. Even though this may not prevent the actual audit, the knowledge could serve to calm your nerves and help you prepare.
Lifestyle and Income
One reason for the audit might be you’ve used several deductions on past tax returns and don’t have the income to justify them. The auditor wants to see that your lifestyle actually matches the deductions you’ve claimed. You can keep some of the pressure off by not dressing as if you have as much money as you might claim on your returns. If you do, you can expect more than a little scrutiny.
Entertainment and Business Expenses
Always be honest about your personal expenses and your business expenses. Always. Some small business owners like to claim personal expenses, such as entertainment, vacation and meals, as business expenses to take advantage of the tax write-offs, and doing so can trigger an audit. You can’t just say the expense was taking a client to dinner; you’ve got to show receipts and provide names of the individuals you entertained. If you do use business expenses as tax write-offs, always keep your receipts and write detailed information on them for your records.
On a related note, you should also think twice about listing an abundance of miscellaneous expenses. The IRS is likely to view all of those expenses with a critical eye and get the impression that you aren’t very diligent about keeping good records, you are simply unorganized or you have something to hide.
It’s fine for you to use your personal vehicle for business purposes and write off the expense, but you have to keep detailed logs of the number of miles you drove for business purposes (and only business purposes). Alternatively, you can keep up with the cost of maintaining and fueling your vehicle throughout the year (again, only for business purposes) and use that on your tax returns as well.
Undeclared Cash Flow
If your business handles a lot of cash, one reason for your audit could be because the IRS believes someone might be skimming or that you’re diverting cash into your personal income without properly claiming it. In any case, make sure you’re able to account for missing sums of money.
Independent Contractors and Employees
One reason business owners enjoy having independent contractors perform work for them is because of the reduced overhead. It’s not unusual to hear of companies hiring individuals and misclassifying them as independent contractors or freelancers simply to save money. If you ever have a contractor perform work for your business, be sure the individual signs all necessary paperwork and that you send a 1099 that lists the individual’s total earnings for the year.
Payroll Taxes for Employees
If you do hire regular employees, be sure you withhold enough of their payroll taxes throughout the year. Whenever the IRS audits you, they want to see that your payroll taxes are both correct and complete.
Consider a Professional
It’s a good idea to hire an accountant or tax attorney to deal with the IRS auditor. Bringing in someone to help with the process won’t be misconstrued as an act of guilt, and many auditors actually prefer working with tax professionals who know how the process works. Failing an audit could result in penalties, a bill for any taxes a business owner fails to pay and possibly even jail time. Prepare and educate yourself and don’t hesitate to spend money for professional assistance to protect your business.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.