Audits can be particularly intimidating for small and medium-sized business owners, especially since they might owe more taxes or be personally accountable without professional accounting support. However, only about 1 in 100 companies are audited annually, and there are ways to avoid attracting IRS attention.
Key Tips:
High Earnings: If your business earns over $1 million annually, it’s wise to incorporate to protect your assets.
Report All Earnings: Ensure you report all your earnings.
Reasonable Deductions: Avoid claiming business deductions that are disproportionate to your income.
Common Audit Triggers:
Unreported income.
Disproportionate deductions.
Errors on returns.
Preventive Measures:
Entertainment Expenses: No longer deductible under the 2017 Tax Cuts and Jobs Act.
Deductions: Be aware that the IRS algorithm checks for unusual deductions.
Incorporation: Consider forming a corporation or LLC for reduced audit risk.
Handle Irregularities Proactively: Address any discrepancies before they raise red flags.
Amended Returns: Avoid unless absolutely necessary.
Electronic Filing: Reduces error rates and speeds up refund processing.
Handling Audits: If audited, be transparent, provide necessary documentation, and cooperate with the IRS. Use accounting software to minimize errors and consider hiring a reliable accountant.
