Although tax season won’t arrive for a few more months, the best way to come out of the process on top and in the clear is by being prepared throughout the fiscal year, to mitigate any chance of being audited after you submit your tax documents. While F & F Business Services, LLC can’t promise total audit protection, if you follow these easy steps they can greatly diminish your risk of being audited.
1. Keep Backups of Your Important Financial Records
Benjamin Franklin’s maxim “An ounce of prevention is worth a pound of cure” is as true today as it was two centuries ago. Taking the time to make copies of your financial records, either the old-fashioned way, with physical file folders, or with more modern means by scanning documents in and keeping them on a secure electronic storage device will not only set the stage for you to prepare your taxes, but will also act as a rescue net in the event of an audit. If you have copies of business receipts and expense reports, with income and dividends carefully tracked, and receipts for charitable donations in one easily accessible location, you will be more likely to accurately represent your finances to the IRS, and less likely to overlook something important.
2. Following the IRS Guidelines for Filing Taxes
This may seem obvious, but when we consider the ways in which a business can change in the course of a single year — selling or buying property, changes in annual charitable donations, major equipment purchases, changes in employee healthcare under the ACA — paying close attention to the specific guidelines for your business’s current situation is crucial. Events such as these can alter how you submit your business taxes in sometimes subtle ways, and it is important that you and your tax preparation services be aware of these changes.
Many of the “red flags” that alert the IRS to the need for a possible audit are simple failures to follow guidelines. A few of them include:
- Failing to submit your personal and business taxes on time.
- Spelling errors in Employer Identification Numbers (EIN) across tax documents.
- Not filling out every required section fully, or accidentally skipping a required line.
- Over-use of tax write-offs, such as designating a personal car taken home for the weekends as being 100% used for business purposes.
3. Making Sure that Business Expenses and Personal Expenses are Separate
As the car example above showed, it can sometimes be tempting to dip personal expenses into the business expense pool. This is a common reason for the IRS to audit businesses, however, especially for small, family owned businesses where the line between business expense and personal expense can sometimes be blurry. Temptations to over-inflate estimates for the meals and entertainment or vehicle deduction abound, but accurate, well-kept records will provide a safeguard against such attempts.
4. Paying You and Your Employees Fair Salaries
Actions such as excessive over-payment of salaries to owners and workers can flag a business’s tax returns for an audit. Paying both employees and owners a reasonable salary, based off of market expectations, will not attract the IRS’s attention, but a business owner or employee being paid far over what might be expected for employees or owners of a business of similar size and scope does raise red flags.
While following these four steps cannot guarantee that the IRS will not audit your business, they can reduce the likelihood of being audited in the future. For further information about what you can do to prepare your business’s taxes, contact F & F Business Services, LLC, where we’ll be glad to lend you our business bookkeeping and tax preparation expertise.