How to Avoid Getting Audited by the IRS
Are you concerned about your small business getting audited by the IRS? Many small business owners aren’t aware of the red flags that the IRS looks for when auditing businesses. By educating yourself on common red flags, you can dramatically reduce the chances of your business being audited.
- Entertainment spending, such as purchasing lunch for clients and consultants, can be a great way to build connections. A percentage of that purchase can be deducted. However, excessive entertainment could alert the IRS, as entertainment spending can be used inappropriately by businesses to the point of becoming extravagant and receive tax deductions. Always keep track of receipts and maintain detailed records of your expenses.
- Do your research on the number of deductions that other businesses in your industry are taking. It is valid to take every deduction that comes your way, but if you have significantly more than most other businesses in your industry, a call from the IRS is very common.
Be especially careful when it comes to deductions on vehicle mileage and business travel!
- Always file your taxes on time! If you consistently file late, the IRS may start taking a peek into why. Remember that you can file electronically and that JDM Business Services is happy to help with the process!
- Small businesses often face IRS audits more often than larger corporations since they stereotypically demonstrate more operational and financial competence. The IRS is more likely to suspect self-employed people for fraud, so incorporating could lead them to believe you more.
- Giving financial contributions to charity is a great business move. It is also is a great way to support your community and the world. Be warned that if you make a large donation seemingly out of the blue on paper, the IRS may ask questions!
- If you are paying in cash – especially when it comes to larger purchases (think company vehicle, equipment, etc.) you are sure to flag down the IRS. Record every purchase and transaction in precise details to effectively create a paper trail. While it is absolutely fine to pay with cash, credit, and debit cards help when it comes time to file your taxes.
- Report all taxable income made in the US to the IRS. If you are withholding, the IRS will likely find out and audit your business. This is why recording and calculating all income and transactions is a must!
- Last but not least, if you have employees, provide reasonable salaries. When the IRS is made aware of unusually high salaries in a business, they tend to focus on it and audit that business.
The IRS isn’t something to fear, but an audit takes a lot of time that could be better spent working hard for your business or taking a well-deserved break. Follow these tips and you are sure to drastically lower your chances of receiving an audit.
JDM Business Services is here to make your life easier. Whether you are looking for a bookkeeper, somebody to help with your taxes, or experts in programs like QuickBooks, you’ve found the best place!