If you’re like many other small business owners, then you understand the fear of an audit quite well. Although audits are fairly rare, they’re very disrupting when they do happen. Small businesses in particular are being targeted for more audits, making it imperative that you know how best to prevent and handle one if it does occur! Check out the rest of this article to figure out how!
Audits are Difficult
Put simply, audits are very messy. Their sole purpose is to find out whether or not you accurately reported income and expenses. Because of this, an audit can often feel like an irritated parent searching through a naughty child’s room. When you are slapped with an audit, it can often feel like the IRS is assuming you are guilty of something.
Whether you actually intended to defraud the IRS or not, perfectly filing your tax returns every year is no simple task. If you opt to file without professional help, you can potentially make mistakes that will prompt an audit. Once an audit begins your options are fairly limited, so the best way to manage an audit is to prevent one from happening in the first place.
Impact of an Audit
IRS audits are very disrupting. An auditor will request financial documents from you to verify the information you included in your tax return. You’ll also need to directly meet with an IRS agent to provide them with your financial records.
What happens next ultimately is determined by their findings. Most often, a correspondence audit is performed, which results in you need to file an updated return. Very often this entails paying a higher tax amount.
The most stressful part of this process is attempting to collect all documentation. You need to be able to verify numbers you entered on your return, so you’ll need receipts for all of those corresponding transactions. Often times you may not have saved all your receipts, which will make this process quite stressful.
Without a doubt, the best way to deal with an audit is to not have one at all. This is trickier for small business owners because of how the IRS specifically targets them, but if you do your best to file as correctly as possible, you’ll greatly reduce the risk of actually receiving an audit.
So how can you prevent an audit? The answer is that there are specific parts of a tax return that are more likely to flag an audit. To prevent fraud, those areas aren’t known to the general public. However, following the techniques below have been shown to help reduce the likelihood of an audit:
- Honesty – It may seem like common sense, but honesty is definitely the best policy when it comes to the IRS. The problem with lying to the IRS is that almost every time you do, there is a way for the IRS to prove that you are lying. If you under-report an employee’s earnings, they can look at your employee’s W2 and they’ll see a different figure than what you reported. For every number you record, there is something to prove or disprove that figure, making it crucial for you to be honest from the start.
- Report Everything – If you have to ask yourself whether or not something should be reported, then the answer is probably yes. It is much better to be safe than sorry, especially considering many audits are for the purpose of discovering unreported income. Report all your income, otherwise the IRS will discover and request tax on it later.
- Carefully Select Deductions – Aside from failing to report income, improperly selecting deductions is the other main way to prompt an audit. One good thing about our tax system is the wide availability of tax deductions filers can choose from. Each deduction does have very specific requirements for you to claim though, and many people claim deductions they aren’t entitled to. Business deductions are the largest offender here, as they can drastically reduce the amount of tax owed when claimed.
- Pay Quarterly Taxes – If you didn’t know, you’re actually supposed to pay quarterly taxes as a small business. Not everyone does though, which will earn you a minor fee at the end of the year. In addition, the IRS is also more likely to audit you for not filing quarterly taxes.
Handling an Audit
Even if you’ve done your best to prevent one, sometimes an audit is inevitable. An audit doesn’t have to be difficult if you filed in good faith and prepared beforehand. Here are some tips to help you handle an audit:
- Organization – Hopefully you kept all relevant financial documents throughout the year. You’ll want to keep them organized and easily accessible for an auditor to look through. Some common documents you’ll need include tax returns from previous years, receipts from purchases, and pay stubs. There are many different documents they could ask for, so be sure to keep all your documents organized.
- Courtesy – Although an auditor is checking to ensure the validity of your return, they are not personally invested in the outcome of your audit. This means they don’t have any ill feelings towards you. Do your best to remember than an auditor is human, and they’re simply trying to do their job. Courtesy may not get you out of paying additional tax, but it will certainly make your auditor more understanding and willing to work with you.
- Professional Defense – Even if you’ve tried yourself to prevent an audit, sometimes you just don’t have the skills or patience to handle one. The best way to actually handle an audit is to have a professional accountant defend you! Accountants can also analyze your financial documents, but with the interest of protecting you rather than seeking more tax. They’ll give you peace of mind knowing that your audit is being professionally managed!
Audit Defense from a Pro!
No matter what business you operate, nobody likes to endure the hassle of an intrusive audit. The IRS will go through all of your financial documents and records, making your business feel exposed and vulnerable.
When considering an audit, your first step to handling one should be to prevent one from happening in the first place. You can do this by ensuring you file your tax return honestly. Be sure to report all income, and only choose deductions that you know your business is eligible for. Opting to pay quarterly taxes is another way to help safeguard against an audit.
In the unfortunate event that your business is audited, take a moment to relax and understand the situation is manageable. Carefully keep your financial documents organized and accessible, and be sure to treat the IRS agent with courtesy.
If you aren’t comfortable defending yourself or want the reassurance of a professional, seek out the assistance of Felde CPA Group! Their rich history of experience and professionalism has prepared them for handling all types of accounting needs, including audits! Check out their services today to see how a CPA can help your business avoid an audit!