Welcome to April and the countdown to Tax Day! Whether your taxes are already filed or you are still putting the finishing touches on your return; we all have one thing in common. We would meticulously avoid a tax audit if given the chance. Last week we touched a bit on letting go of your worry over being selected for a tax audit. Luckily, there are some common areas know to trigger flags and audits on small business returns. If you can avoid them, your odds of an audit will likely be reduced. This week and next, we’ll talk about some things you should pay special attention to when filing your small business taxes.
Failing to Report Income – The tax forms you receive from your company are also filed with the IRS. Their computers are very good at matching up the numbers on those forms with your return. A mismatch will most certainly send up a flag. Be sure you know what is, and maybe more importantly what is not, reported on your 1099 form; and report all required income on your return.
Taking Excessive Deductions – If the deductions on your return are higher than average, or disproportionately large compared to your income, your return may be pulled for review. However, if you have proper documentation for your deductions, don’t be afraid to take them. No one wants to pay more taxes than what they actually owe! Remember that an expense must be “ordinary and necessary” in your line of business for it to qualify as a deduction.
Sky High Meals & Entertainment Expense – There is such a thing as too much fun. The proof is on your tax return! If your meals and entertainment expense line is higher than average, you can be sure a flag will be raised. If you plan to deduct these kinds of expenses, you should be sure to keep detailed records of who was in attendance and how it relates to your business.
Rounding – Tax prep is not a game of horseshoes where close enough counts. If your business income for the year was $47,003; do not round to $47,000 on your tax return. Accuracy is important when it comes to tax preparation. If the income you report is rounded, the IRS might assume that you have taken other short-cuts in your return as well.
While there is no sure fire way to completely avoid a tax audit, being aware of these common audit triggers may help. If you are selected for an audit you can expect it to be a thorough and potentially lengthy process where you will be asked to confirm your income and deductions. Be sure to keep organized records to make the process as smooth as possible. And be sure to come back next week for a few more suggestions. In the meantime, happy tax filing!!