Avoiding An IRS Audit Of Your Small Business In 2013
Written by Tim Morral
Tax season is here again and reducing your company's tax burden is a high priority. But which deductions are most likely to trigger an IRS audit of your business?
Every year at this time, small business owners across the nation engage in the familiar routine of gathering information and preparing documents for federal and state income tax filings.
Unlike investments in equipment or additional hiring, taxes are an expense that generates absolutely zero return to the company. So it's only natural for owners to explore every possible opportunity to minimize their overall tax liability.
And that's where business tax deductions enter the picture. Qualified deductions offer business owners a potentially effective way to decrease taxable income. When legitimate, tax deductions can significantly reduce the amount of money your business pays the IRS.
But since 2001, IRS audit rates have quadrupled and the number of notices the IRS has issued to taxpayers has increased by a factor of seven. So if you're not careful, it's possible to trigger an IRS audit -- even if the expenses you're deducting are allowable under the IRS tax code.
Some of the most common audit flags are "mismatched" expenditures. The amounts reported on IRS mechanisms like W-2s and 1099s must match the amount of the deductions claimed on your return. If the numbers are radically misaligned, it's a safe bet that the IRS will want to take a closer look.
The IRS is also finicky about retail operations where the cost of goods sold consistently exceeds gross revenues. Although you might get a pass the first year or two, it seems unlikely that an operation selling products below cost is a viable long-term business venture.
Another audit warning sign is when a business rounds income and expense figures. For example, if your return is full of numbers like $10,000 and $30,000 rather than $9,993 and $30,250, the IRS will suspect that your recordkeeping system is substandard and may be interested in seeing your books firsthand.
Although any small business has the potential to be audited, there have been some reports that the IRS has recently been targeting small Schedule C contractors, many of whom lack the documentation to verify the deductions they claim on their returns.
At the end of the day, the best defense against an IRS audit is to maintain an accurate recordkeeping system, and establish a filing system to archive receipts or other documentation verifying the legitimacy of your claimed deductions.
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