Tax audits are something no one likes to think about. No business owner or accounting team will ever admit that having to send over every piece of detailed expense and income information is a fun time. For small business owners, who usually don’t have the benefit of an in-house expert, these can be even more intimidating. It’s important to have a skilled team on your side and thanks to remote accounting teams who work on accounts for you, it doesn’t have to become the nightmare it’s been painted to be in the past.
This post will take a closer look at tax audits for small business owners and offer some tips on how you can be best prepared to handle them when the time comes.
What is an IRS Tax Audit?
An IRS tax audit is as the name suggests, a review and close look at how an organization or individual is accounting for their finances to ensure they are compliant with tax laws and being reported honestly and accurately.
These audits are done by the Internal Revenue Service to help minimize the tax gap between what is owed to them and what is actually paid to them. It is based on The Internal Revenue Code (IRC) law which codifies all federal tax laws. This includes things like income, estate, gift, excise, alcohol, tobacco, and employment taxes.
Once they’ve reviewed the information, they may for additional documentation such as statements, reports, and receipts support what’s been reported.
In case you haven’t guessed yet, anything that looks suspicious or doesn’t match up begins the red-flag process and triggers an audit.
Is there a way to avoid tax audits?
It’s not always a suspicious activity that can make a tax audit letter arrive on your desk. Simple errors like entering a social security number wrong, spelling names wrong or even making a math error are all reasons to be audited. Thanks to our digital landscape now, filing electronically can help catch some of these errors before they become issues. Either way, as a business owner you should always have an expert team who can help ensure you’re reporting accurately and submitting error-free filings.
What triggers tax audits for small businesses?
For small businesses especially, it’s easy to think that because you don’t have too many transactions and business happening in a calendar year compared to big businesses that you can get away with trying to handle all of the tax reporting and reconciling on your own, but oftentimes this is what leads to tax audits for small businesses. And just as it would take additional resources to hire help in advance, you’re going to be left feeling pressed for time and unsure if you end up getting audited anyways. It’s worth it to invest before and make sure all your bases are covered. In fact, back in 2020, the IRS said it would be increasing the number of tax audits it does for small businesses by 50 percent in 2021.
Just a few of the common things that trigger tax audits for small businesses include:
- Misreporting Income
- Disproportionate Deductions
- Excessive Expenses
- Lots of Cash Transactions
How to respond to an IRS tax audit letter
If you’re a small business and you’ve received an IRS tax audit letter, don’t panic. The good news is that you can hire experienced and reputable tax preparation specialists like DOAAR to successfully navigate an audit. We will work with the IRS auditors on your behalf. We understand the lingo and the documents they’re looking for and you can concentrate on running your small business.
DOAAR provides tax resolution services and industry-specific knowledge of all tax laws and current regulations to help ensure you’re making the right choices and remain in good standing with the IRS.