Small Business - Audit Errors

The IRS announced in late 2020, that in 2021, there will be a 50% increase in small business tax audits. No one wants to upset that apple cart, right? That’s why we’ve listed a few errors to avoid if you do happen to be audited by the IRS.

• Missing income. After many years of investigating this subject, the IRS auditors will focus on under-reported income. Expect greater scrutiny from the IRS if you’re a business that handles cash. Also, if you generate miscellaneous income that you report on 1099 forms to the IRS. It’s vital that you keep good records and track and document all income no matter the source. You can substantiate income amounts through invoices, sales receipts, bank records, and profit and loss statements.
  
  
• Business losses that are higher than normal. Some small businesses may struggle early on to make a profit but eventually do make a profit. The IRS may view your business as a hobby and disallow certain deductions if your small business never makes a profit.
  
  
• Deductions lacking validation. Here’s a few questions: Do you use your home office “only” for business? Do you write off auto expenses for you’re only car? If the business only earns $60,000 a year and you claim $15,000 in charitable donations? The auditors want your documents to match the deductions claimed on your tax return. Having clear and accurate documentation will satisfy the auditors. If for some reason you can’t locate a certain record, check with your vendors to see if they may have copies of the records you need.
  
  
• Expense reports. Does your small business use a credit card for purchases? You can create an expense report with your account numbers and attach it to each statement as well as copies of the bills that will support the charges. IRS auditors know that expense reports are an easy place to blend personal and business expenses.
  
  
• Keep separated books, bank accounts, and statements. Never use personal expenses in a business account or business accounts through your personal accounts. You need separate bank accounts and credit cards for each. You’re just looking for trouble if you don’t.
  
  
• Think of the auditor as an enemy. They are not your friend, they have a job to do. Maintain an attitude that is professional courteous. If you go to their office be on time and dress professionally. If they come to your office, instruct all staff to answer questions completely and honestly.

At Summit CPA we offer multiple resources to assist and help your business grow. If you’re ready to get an edge on your competitors? Contact our office at (866) 497-9761to schedule an appointment with our advisors.