U.S. Small Business Tax Audit Triggers and How to Handle Them
As a small business owner, you have a lot on your plate. You are responsible for marketing your business, generating sales, and providing quality products or services to your customers. You likely don’t have time to worry about the possibility of being audited by the IRS. However, it is mandatory to be aware of the triggers that could lead to an audit so that you can take steps to avoid them. Fortunately, you can always rely on the best Ascott Blake Chartered Accountants for this job. But still, it’s more than the icing on the cake to learn about those triggers. So, keep reading, and you’ll find out some of the most common small business tax audit triggers and provide tips for handling them if they occur.
Reporting Losses Year After Year
Have you ever wondered why some businesses never seem to make a profit? The answer may be simple: they’re reporting losses year after year. While it’s certainly possible for a business to experience a loss in its first year or two, reporting losses for several years in a row is a red flag for the IRS. Let me explain it to you. If your business has been operating at a loss for a few years, the IRS may question whether it is a legitimate business or if you are using it to avoid paying taxes. They may also question whether you are accurately reporting your income and expenses. To avoid being audited, keep accurate records of your income and expenses.
Huge Amount of Cash Transaction
Another trigger for a small business tax audit is a large amount of cash transactions. If your business regularly deals in cash, the IRS may question where the money is coming from and whether you are reporting all of it. In fact, the IRS has a specific form that businesses must use to report cash transactions of more than a certain amount of money in a single day. To avoid being audited, be sure to keep accurate records of all cash transactions and report them accurately on your tax return.
Misreporting Your Income
If your business is audited, one of the first things the IRS will look at is your income. They want to ensure that you are reporting all of your income and not underreporting it to avoid paying taxes. Many business owners sometimes decide to inflate their expenses to reduce their taxable income. However, this is a huge mistake because it is very easy for the IRS to catch. If they find that you have misreported your income, you will be subject to an audit and may owe back taxes, interest, and penalties.
Disproportionate Deductions to Your Income
Aside from those above, if you try claiming disproportionate deductions to your income, it can also trigger an IRS audit. For example, if you are a sole proprietor with an annual income of $50,000 and you claim $30,000 in business expenses, the IRS may question whether your deductions are legitimate. They may also question whether you are accurately reporting your income and expenses. To avoid being audited, keep accurate records of your income and expenses and only claim deductions to which you are entitled.
As a small business owner, being aware of the triggers that could lead to a tax audit is a must. By taking steps to avoid these triggers, you can minimize your risk of being audited by the IRS. If you are audited, cooperate with the IRS and provide them with accurate information. Do not try to hide income or inflate expenses, as this will only make the situation worse.…
When you deal with numbers and financial reports all day, it’s easy to get bogged down in the details. This is where an accountant can step in and help you see the big picture. An experienced accountant will know how to streamline complex financial matters so that you can make informed decisions quickly and confidently. Think of having raw data in front of you versus having that data converted into a clear and concise report. Which would be easier to make decisions with?
If a business isn’t doing so well financially, we can use accountants to know why. Maybe someone is skimming off the top? Or perhaps you have expenses that you’re not aware of? Whatever the case may be, an accountant will be able to help you get to the bottom of it. On the other hand, if a business is doing well, an accountant can help them to grow even further. They can provide advice on investing money wisely and how to expand into new markets. In short, accountants are an essential part of the modern business world.