Tax audits can be time and money consuming, as well as frustrating for all parties involved. In a previous post, we gave California small business owners some tips on responding to tax audits. In today's post, we discuss measures that may help small business owners avoid an audit in the first place.
The first tip is to avoid the temptation to go it alone when filing taxes. Utilizing tax software of professionals can help eliminate potential risks and red flags before problems arise. The second tip is to ensure that business and personal expenses are kept separate. The IRS is notorious for checking to see if personal expenses are included in business tax returns.
The third tip is to always report all gross income amounts, not just net revenue. An example given is highly applicable to today's business owner, that of PayPal, which deducts its fees from gross payments. When reporting income, the amount of the PayPal payment made before fees are taken out must be considered. The fourth tip is to spell out unusual deductions in greater depth than merely miscellaneous. This will help the IRS verify the information without needing to conduct an audit.
The fifth tip is to be on time with tax deadlines. When business owners file paperwork late, they can appear unorganized, which can raise red flags with the IRS. Not only does this mean meeting deadlines for filing yearly income taxes, but also quarterly taxes. Also, being on time with 1099's is important.
California small business owners likely want to avoid tax audits if at all possible. In some cases, even the most prepared business owner can find themselves subject to an audit. One important key is that business owners not panic if they do find themselves facing an audit. With the right support system, tax audits may be successfully navigated with minimal consequences to the business and business owner.
Source: Fox Business, "How to Avoid a Small Business Tax Audit," Aug. 6, 2012