How to get an Audit for your Small Business
The dreaded A- Word!!!! AUDIT!!! While audits for small businesses are less frequent than audits for individuals and large corporations, they are most certainly on the rise. Audits can be scary, time-consuming, and exhausting. I think we can all agree a root canal would be better. No one wants to go through either one. Some audits by the IRS are entirely random, and you were chosen for no specific reason (go by a lottery ticket while your luck is so on point); other times, there is something “off” in your return that has grabbed the attention of the taxman.
We have found three of the biggest and most common red flags. Each one, if the numbers are out of place, will land you an appointment with the IRS. Let’s go over each one, learn why and how to avoid them.
Cash is King –
If your small business conducts a large number of cash transactions (think restaurant, bar, laundromat, etc.), you are already at a higher risk for an audit. This increased risk is due to the increased chance of skimming and other fraudulent practices. Be vigilant in honestly recording all cash transactions. As a follow-up, having the paperwork to back up your filings is crucial and can save you if an audit comes along.
Where you need to focus is on any transactions (cash or trade) over $10,000. You need to use a form 8300 (also excitingly called Report of Cash Payments Over $10,000 Received in a Trade or Business). The filing of an 8300 helps the IRS combat money laundering and other fraudulent and illegal activity. Not filing a form 8300 can result in fines and possibly civil or criminal charges. Seriously, file it.
Working within a budget and making sure your accounts receivable and payable are in check are also efficient ways to keep the IRS for wanting to take a more in-depth look at your cash finances.
All play and no work –
Part of running and owning a small business is networking and entertaining current clients and possible future clients. Those costs are most definitely tax-deductible, but be careful. Be mindful that too much “play” can alert the IRS, which in turn can lead to an audit. No deducting your personal hobbies or habits as “business expenses.”
As a rule of thumb, claim 50% or less of entertainment & food expenses as a business deduction. Keep it realistic and as always, save receipts and document, document, and document again.
Chances are you have employees. I mean, you are running a business. That means you get to pay payroll taxes. You also get to pay them on time. YEA! The IRS will notice if you have only “independent contractors” as your workaround for filing payroll taxes. This tactic could cost you dearly in fines.
The most efficient way to make sure your payroll is accurate and honest is to outsource your business payroll. Since your expertise is in other areas, hiring it out is a great way to get it done right and save your stress and headaches.
These are not the only red flags that may alert the IRS to your small business, but they are prevalent and also the easiest to avoid There is two easy and cost-effective ways to avoid an IRS audit. First, hiring a tax professional or an accountant certified in filing tax returns is your best bet to avoid an audit. The tax laws are continually changing and can be challenging to keep up to date on. Not only will your tax return be correct, but it will also leave you time to run your business. Second, use Reach Reporting all year long to keep track of your finances, see where you stand before tax season comes around.