Taxes

6 Tips to Avoid a Small Business Tax Audit

By Justin Reynolds

If you’re not prepared, receiving a request from the IRS for a tax audit can be an absolute nightmare—and even if you are, who wants to spend hours, days, weeks or even months dealing with IRS agents? There’s no doubt tax season can be hectic for small business owners—particularly when they lack the resources to hire an accountant.

To reduce the likelihood your company will be audited, consider the following six tips:

1. Accept the fact that all businesses have to pay taxes

You might think your tax ninja skills are better than everyone else’s when it comes to reducing your overall responsibility, but at the end of the day, everyone has to pay their taxes. Your small business isn’t Pfizer.

2. File your taxes on time to avoid a tax audit

If you stay on top of your tax situation all year long, you won’t be in for a rude awakening come tax time. However, even if you aren’t on top of your tax needs, you still need to file your taxes on time. (Don’t forget: We have until April 18 in 2016.)

Because the IRS allows an extended deadline if you ask for it, there’s really no reason to pay late. Missing the deadline could result in a red flag for you—leading to a tax audit.

3. Make sure your numbers are precise

A common sense reminder: Check your math, then check it again. If your numbers don’t match up with the numbers your clients provide to the IRS, there’s a good chance that the tax man will say hello to you.

4. Remember: You can’t deduct everything

You may be tempted to buy a new RV and deduct the whole thing because you drove it to a conference once, but the IRS wasn’t born yesterday. According to the SBA, there are 28 million small businesses in the United States. The IRS knows the tax code, and they’ve seen it all before—even that super fancy “loophole” you think you’ve uncovered.

Err on the side of caution. If you’re not sure what you’re legally allowed to deduct, why not head straight to the source? Better yet, ask your accountant.

5. Hire employees—don’t rely solely on independent contractors

Part of the reason businesses like working with independent contractors is because in doing so, they avoid having to pay payroll taxes. However, the IRS has very clear guidelines as to exactly which workers need to be classified as employees and which can be classified as freelancers.

If you’re classifying a lot of the folks you depend on as contractors, the IRS might ask you to open your books.

6. Cooperate with any communications from the IRS

Whatever your opinion of the government agency is, the IRS is certainly not a force to be reckoned with. Just ask Wesley Snipes. If you get a letter in the mail from the IRS, responding should be a top priority.

The IRS is not the bogeyman. Like anyone else, IRS agents are just doing their jobs: making sure you’re paying your taxes properly. They won’t be feisty right away, but they’ll remind you who they are if you ignore their requests and inquiries.

Bottom line: If you keep accurate records and run your operations honestly, you won’t have anything to worry about, even if you have the misfortune of getting audited—but you don’t want to lose time talking to the tax man when you don’t have to, so plan accordingly.

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