Tips For Preventing A Tax Audit On Your Business Taxes
Many accountants know that being compliant with sales tax can be a bit tricky, and it can turn out to become an accounting nightmare. There is a lot that goes into place when it comes to preventing errors on your business taxes. A slight error can lead to a tax audit, and this is something many business owners desire to avoid. Here are a few tips on how you can avoid errors in your business taxes.
Ensure That You Confirm Your Numbers
When you receive a tax report form reporting your income, the IRS also receives a form. They expect that the information on your report form will match what they have. If the IRS notices any discrepancies, then they can decide to audit your returns. In addition, your tax returns can attract unnecessary attention in case your numbers are not adding up. Everyone can make mistakes easily. Therefore, it is advisable to make sure that you confirm any information that you submit on your returns and also confirm your math.
Avoid Reporting Loss Every Year
Reporting net loss more than two years in a period of five years can make you a good candidate for a tax audit. As a result, the IRS might categorize your business to be a hobby and end up disallowing all the expense deductions in your business.
Good Record Keeping and Accurate Reports of Income and Expenses
Keeping your business's expenses and income in a bank account and keeping the expense receipts can help in minimizing the chances of a tax audit. This makes it very easy for you to organize your tax returns. In addition, you will be in possession of the documents you require to confirm your returns in case you are audited.
However, you can increase the chances of a tax audit when you try to exaggerate your expenses or hide your incomes. Even though it's OK to round off your numbers to the nearest whole number, rounding off tens and hundreds can make the IRS believe that you are fudging your numbers.
Be Careful with Reporting Independent Service Providers
Your business is most likely to be audited if it has a higher percentage of independent service providers to employees. The reason behind this is that many businesses use independent service providers to evade paying staff taxes. It is important to understand the IRS guidelines about independent service providers and employees.
It is important to make sure that you understand and comply with these rules. If you are not sure, it is advisable to consult a small business CPA to make sure you are doing everything right.