Are you afraid of an IRS Audit? While complying with tax reporting and filing requirements is important for the longevity of any small business, many business owners are overly-fearful of being audited. For starters, federal budget cuts have led to the IRS being drastically under-staffed. In the last two years, less than 1% of people who had income under $200,000 were audited. Since the IRS has less enforcement officers, those remaining officers are focused on catching bigger fish. In addition, there is a time limit for the IRS to take action against you and begin an audit into your tax return and finances.
I am not advocating that you engage in tax evasion. Still, if you are aggressive in claiming deductions for your business and if you are concerned about being audited, there are a number of steps you can take to reduce your risk of being audited. The steps are as follows:
1. Check your figures and make sure you’ve done your math accurately.
2. Keep receipts for charitable donations. It is crucial to have some sort of receipt for any charitable donation you are claiming on your tax return.
3. Review social security numbers. Remember, simple, clerical errors are one of the most common causes of IRS investigations.
4. If you earn a large amount income, expect the IRS to watch you more closely. For high income taxpayers, the IRS often checks to see if the alternative minimum tax applies.
5. Do not forget that life-changing events also change your tax status. If you had a baby, got a divorce, got married, or bought a house, these events will impact your tax return.
6. Do not fudge or round your numbers. Failure to report ALL income or payments received for household help can be a trigger. Failing to report large gifts or overstating business expenses can also be a red flag for the IRS. Finally, "round numbers" are another flag. If you are claiming a deduction for $19.78, don't round it to $20.00.
Not only will these steps reduce your audit risk, but it will also increase your likelihood of a favorable outcome in the event you are audited.
A to Z Accounting Services, LLC can analyze your current accounting practices and help you implement strategies to lower your audit risk. If you are concerned about managing your audit risk, contact us to set up a consultation.