There are few things more frightening to a small business than an IRS tax audit. In the aim to avoid a possible audit, many small business owners are overly conservative with their tax filings; however, this may result in paying more money in taxes than necessary. At the same time, a simple mistake could act as a red flag, triggering an audit even when the company is fully compliant with the laws.
Statistically, the chances of getting audited by the IRS are very small. However, by sticking to some simple guidelines, you and your small business may be able to shrink that risk even further. Your business and tax attorneys will be able to help you plan ahead to reduce your tax liability and advise you of any red flags that may trigger a tax audit.
Check and double-check your work. While filling out forms with endless numbers, codes, and dollar amounts, it is easy to miss a digit, put the number in the wrong field, or miss a decimal point. You may miss the impact of this error until after you file your taxes and the IRS checks your numbers against their numbers. Anything that stands out will act as a tax audit red flag.
If your current year’s deduction, expense, or income for your business is an anomaly, be prepared to explain why the number is so much higher or lower than in a typical tax year. Your business may have had a sudden increase in expenses due to the market, or your income may have dropped significantly in light of some unforeseen event. A dramatic change in your business expenses and income could act as a red flag.
There are plenty of valid reasons for increased travel expenses or large losses. Make sure that you have the documentation to validate your business expenses or losses, and talk to your tax professionals if you have any concerns about numbers that may stand out.
Many growing companies come to a point when they are no longer able to manage the company’s financial and tax filing requirements. If you are not able to stay on top of changing tax laws, filing requirements, and managing filing deadlines, it may be time to seek professional assistance. Not only will experienced business and tax attorneys help you avoid making costly tax mistakes, this may also free you up to concentrate on growing your business.
Remember, an IRS audit is not the end of the world. A correspondence audit may ask for additional documentation and copies of records. They may even simply send an updated invoice if an error is discovered, without the need for an audit. A simple accounting error may easily be explained, in some cases, with no additional tax payments or penalties. In some cases, an audit could even identify an increased refund.
After the IRS conducts an audit and imposes additional tax liability and penalties, you still have a chance to appeal the government’s audit. The IRS offers mediation to help you come to a mutually agreeable solution. You may also file an appeal with the IRS Office of Appeals.
Butterfield Schechter LLP is San Diego County’s largest firm focusing its law practice on business, employee benefits, and tax law services. Our firm can help your business reduce its tax liability while avoiding IRS red flags. If your company is involved in an IRS audit, we may be able to help. Contact our office today with any questions on how we can help you and your business succeed.