Small business owners across the country are making preparations to file their tax returns. However, supplying the Internal Revenue Service with an incomplete, inaccurate or otherwise conspicuous tax return can result in an audit that can prove to be incredibly costly, in terms of both money and time. Here are a few tips on how to avoid an expensive and time-consuming IRS audit.
Double check all your figures
As this TurboTax article points out, one of the most common triggers for an IRS audit is a tax return that simply doesn’t add up. Without any intent to deceive the government, an owner could end up turning in an inaccurate tax return because they incorrectly calculated their expenses, or accidentally transposed a few key numbers. While the advent of tax-preparation software has been helpful in reducing these kinds of errors, it’s still hugely important that you double check all your figures before submitting a return to the IRS.
If your business is cash intensive, keep meticulous transaction records
As this Wall Street Journal piece details, the IRS targets tens of thousands of small businesses every year in order to ensure that they are accurately reporting all of their sales. The reason these companies receive extra scrutiny is that many small-scale operations like restaurants, hair salons and mom-and-pop retailers do much of their business in cash. The IRS’s position is that because cash sales don’t leave the same paper trail as other transaction types, cash intensive business are more likely to underreport their revenues. If your business largely deals in cash, it’s imperative that you keep meticulous transaction records. That way, you can lower the risk factor of your company’s return getting flagged.
Be circumspect when claiming expenses
Another important step to take in avoiding an IRS audit is to be very careful in how you tabulate your dining, entertainment and travel expenses. As this Entrepreneur feature notes, it’s expected that a small business’s reporting will include these expenses, but excessive deductions in these categories will get noticed. Consequently, it behooves owners to claim these expenses only when they satisfy the IRS’s criteria. After all, you don’t want to subject yourself to the mental and financial burden of an audit because you claimed too many business lunches.
It’s also a good idea for small business owners to retain the services of a qualified tax professional before filing their returns. When it comes to something as essential to a company’s long-term viability as proper financial reporting, it pays to be safe, not sorry.
This article was written by Mario McKellop for CBS Small Business Pulse.