When you run a small business, you take on an incredible responsibility. This obligation to the success of your business often means great sacrifice to relationships and to time spent with family. With all that you give of yourself, the last thing that you want to deal with is an IRS tax audit. If you read this, I hope that you take away a few valuable tips about what the IRS looks for when it reviews a small business tax return.
- Failing to report, or under reporting income. Remember that the IRS receives tax reporting from multiple sources. If your reported income is less than what has already been reported, or if your income does not match what the IRS already knows, your tax return is inviting unwanted attention.
- Clerical errors. The most innocent of clerical errors can lead to big discrepancies in your tax return, triggering an audit. Be sure to double and triple check the numbers after you enter them.
- Continuous year-to-year reported losses are likely to trigger an audit. The IRS is generally skeptical about consistent losses and is more likely to examine a return for improper deductions than to believe a business is in a slump.
- Travel, food, and entertainment expenses. The IRS sees an incredible number of tax returns that over report travel, food, and entertainment expenses as tax deductions. If your reported expenses seem high, the IRS will consider the business you are in, and compare your reported expenses to similar businesses. As tempting as it is to expense that $300 sushi dinner, it is safer to maintain receipts to be able to prove such expenses than it is to overestimate these expenses.
- Vehicle use. Over reporting the use of your personal car for business purposes is a big flag. This problem can be addressed by keeping a travel log on your phone or in a notepad that you keep in your car.
- Underpaying taxes or filing late returns. If your business is not paying enough estimated taxes or is filing returns without an extension, the IRS will take notice. If you need assistance estimating your taxes or preparing your returns, consider hiring a professional. If the IRS perceives your business as sloppy, it is hard to shake that reputation.
- The key is to maintain complete records and to organize them in a manner that is logical and accessible. This will help you to prepare accurate returns and to support your work if the dreaded audit occurs.
If you are running a small business and are experiencing tax problems, call me. You need an experienced tax attorney who can examine your records and provide you thorough advice on how to move forward. I have been a tax attorney for over two decades and have a Master of Law Degree (LLM) in Taxation, and a license to practice in the United States Tax Court. Contact The Law Offices of Robert S. Thomas at 847-392-5893 for an initial consultation or visit our website today.