priligy lima peru

How to Prevent an Internal Revenue Service Audit of Your Business

prevent-an-internal-revenue-service-auditThere is no guaranteed way to prevent an Internal Revenue Service audit, but there are steps you can take to ensure that your business’ return doesn’t include any red flags.

Tax laws are constantly changing, and any tax return can be audited without warning.

Just because you get audited doesn’t mean you or your preparer did anything wrong.

The Internal Revenue Service randomly audits thousands of legitimate returns each year.

Best Practices for Preventing an Internal Revenue Service Audit:

1. Report All Earnings

The biggest red flag is not reporting all of your earnings.

The Internal Revenue Service computers match all Form 1099s, W-2s, and other tax forms to your tax returns by tax ID number, which in the case of your business is usually your EIN.

Any discrepancies will automatically get you a notice or a CP-2000 correspondence audit.

The revenue that is generated by a business must seem logical based on their industry, expenses, and economic climate.

Businesses that continually show losses will likely be further scrutinized.

2. Keep Business and Personal Expenses Separate

Many business owners will attempt to claim large expenses that are completely unrelated to their business. You should always keep your business and personal expenses separate.

Most auditors have enough business expertise to quickly identify personal expenses. They will:

For example, you should not try to pass off an obvious family vacation as a business expense or continually charge lavish meals for you and your friends and family every weekend.

3. Don’t Get Greedy With Your Donations

The amount of money that your company donates should be reasonable given its earnings.

That doesn’t mean you should avoid making donations or not claim everything that was donated, because charitable deductions are beneficial to everyone and you are entitled to your deduction. It just means that you should not try to claim deductions that aren’t legitimate. It’s not okay to just put the same amount as last year if you didn’t actually make the donations or just don’t have the records required.

One particular area of abuse is non-cash donations. You should take care to document all donations and determine the value of the items you donate.

Donations of high value items may require a professional appraisal.

If you have questions, a good place to start is the Internal Revenue Service’s eight tips for deducting charitable contributions.

4. Be Consistent with State and Federal Tax Returns

The state and federal governments communicate with each other. Discrepancies between returns will be investigated.

If you are audited by either department, you will likely end up being audited by both.

Don’t make yourself an easy target. Take the time to compare all of your returns before submitting them to make sure that they match up.

5. Double Check Your Work

Accidental entry errors can happen, and they are not looked upon favorably by the Internal Revenue Service. That is why it is necessary to double check all of your figures before filing.

Your return will stand out if there are obvious mathematical and data entry mistakes.

6. Hire a Professional

Business taxes are constantly changing and can be extremely complicated. There are many possible deductions, credits, and exemptions that you may not know about.

It is in your best interest to invest in a competent licensed tax professional. CPAs and Enrolled Agents are authorized to represent you in front of the Internal Revenue Service, even if they did not prepare the return.

However, not all CPAs are experienced in taxes or in audit representation, so it is in your best interest to request references before hiring a licensed professional.

CPAs are required to take 40 hours of continuing professional education each year just to maintain their licenses.

While it may be hard to justify the additional expense, especially if you are facing a potentially large audit adjustment, an experienced professional’s knowledge and experience with Internal Revenue Service policies and procedures may well save you thousands in additional taxes, penalties, and interest.

The Internal Revenue Service is Already After Me!  What Do I do Now?

Unfortunately, you can do everything right and your business can still be audited.

The good news is that, in most cases, business owners won’t have to endure an actual live interview or onsite audit. Most audits are “correspondence” audits – meaning that you’ll need to send in additional information or proof of your deductions.

However, if you are audited and decide to represent yourself, make sure to have all of the documentation requested ready and available before the meeting or interview. Do not volunteer any additional information. Do not elaborate on your answers unless requested to do so. You may bring other items to their attention or open up other years to increased scrutiny.

Leave a Reply