During the tax season, there is usually a question looming over every small business owner’s head: “What can I do to avoid being audited?” The fear of IRS audits can make filing your taxes an intimidating or seemingly daunting task, but there are several things that can be done to avoid an audit from the IRS and ensure that your filing runs as smoothly as can be expected. Here are some tips regarding how to avoid tax audits of your business with Austin, TX tax services.
Excessive Business Travel Write-Offs
There are ways to properly write off travel expenses related to your business, and then there are ways to lie to the government. One of those ways leads to trouble with the IRS. Constantly writing off family vacations and friendly dinner dates as business expenses will arouse suspicion when the IRS is reviewing your tax information.
If you are planning to write anything off as a business expense, keep your receipts and accurate records of each write-off, who was there, what was discussed, the date, and the location. Remember, you can only write these events off as being related to your business if they’re truly related to your business, unless you like the idea of being audited. If you’re taking your family to a theme park in one city and having a business meeting in another, don’t write off every mile of your travel as a business expense. Write off only what pertains to work, and keep a record to avoid a tax audit.
If you have quite a few business-related deductions that are not proportionate with your income, this might gather unwanted attention from the IRS. If a small business has a relatively low income, but claims a large charitable donation that does not make sense for the income level, the IRS is likely to investigate further.
The Internal Revenue Service tracks and records the average deductions for businesses at different income levels, and they have what’s considered “normal” down to a science. If you’re fully entitled to your deductions and they are at a level higher than what others claim in your position, claim the write offs, but be certain that you have reliable records in place to explain your decisions. Even after you’ve filed, keep track of everything.
Claiming Home Office Incorrectly
Claiming the home-office deduction is another part of tax filing that can get a person into trouble if done incorrectly. If you’re entitled to a home-office write off, by all means, claim the deduction, but be sure that you’re doing it correctly in order to avoid a tax audit.
A home-office deduction must be used only if your home office is in a space that is used only for work. If you conduct your work in the living room of your home, you’re not entitled to a deduction, because the room is not used only for work. Home offices have to be a dedicated space in the house where only work is performed.
If your business is taking losses every year for several years, the IRS is going to notice it, and they might want to audit you because of it. This is because it’s likely that illegal activity is taking place in order to avoid paying taxes. In these situations, the IRS often finds that business owners are claiming deductions that they are not entitled to. Sole proprietorships claiming losses are very likely to receive an audit, because the cause of the losses is often related to the business owner mixing business expenses with personal expenses.
There are legitimate reasons for a business to experience some rough years, especially during their beginnings. This is a possibility with running any business and it’s acceptable for a time. If you’re going to report losses, though, be absolutely sure that you can back up your claims with excellent records. This way, when the IRS decides to have a look at your finances, everything will be in order and you’re not likely to be in any trouble for having a bad year.
Consider How to Avoid Tax Audits with Good Math
When it comes to how to avoid tax audits, math skills are crucial. Rounding and averaging is not an acceptable way to report your income and expenses. Keeping exact records is important so that everything adds up on paper and there are no discrepancies to find when the IRS looks at your records, if they decide that it’s necessary.
For example, if you made a sale for $3,210.08, keep a record of exactly that. Don’t round your numbers and don’t consider averages as an accurate way to keep your records.
Even math mistakes can be a red flag for the IRS. It doesn’t matter if it was an innocent error on your part, an incorrect report is an incorrect report and it might earn you an audit. Be extremely careful when it comes to your math. Even throughout the year, double-check your math so that you’re not scrambling at the last minute to figure out where your missing money has gone.
Business Vehicle Claims
If you have a vehicle that you’re using in relation to your work, you might want to claim a deduction for business use of the car. You can choose between the IRS mileage rate or claiming actual expenses, but if you choose both, you’re likely to arouse suspicion with the IRS. Also, you can claim a percentage of the car’s use, but claiming 100% of the use of your vehicle for business might also have the IRS concerned about your claims. Make sure that if you are using one vehicle exclusively for your business, keep correct records on your mileage, dates driven, and the purpose of your trips so that any suspicion can be quelled.
If your business has a high number of independent contractors at the helm in comparison to employees, you’re more likely to be audited. Sometimes this method of hiring is done so that business owners can avoid paying payroll taxes.
There are guidelines in place that the IRS requires in order for a company to use independent contractors versus employees. Study these rules and be sure that you fully understand how the system works. There are always small business professionals available to answer your questions if you find yourself in a state of confusion.
Poor Record Keeping
Math mistakes aren’t the only record-keeping errors that lead to audits. Keeping poor records and failing to accurately report income and expenses can also inspire the IRS to inspect your records. Any business expense you’ve incurred needs to be written down exactly and include the dates, locations, reasons for the expense, and miscellaneous details.
Do not make the mistake of combining any personal expenses with those related to your business, as this only adds to confusion regarding your records. Being careful will ensure an easier tax return and if there are any issues at all, you’ll have crystal clean records to support all of your claims.
Preparing your tax returns can be a difficult situation for a small business owner, and the risk of being audited for small mistakes does not make it easier. Please be certain that you understand the small business tax laws in your area and if you need help, consider seeking the help of a professional to explain your rights and expectations. This way you can be sure that you’re doing everything that you need to do to avoid tax audits.
If you’re in the market for a tax professional to handle your tax returns this year, consider West Austin Tax for your income tax questions and services. You can visit their website for information, video resources, or to schedule an appointment with one of their professional CPAs. You can also call (512) 330-9400 for more support.
*West Austin Tax is not a CPA firm.