How To Prevent An Audit Of Your Small Business

What comes to mind when you hear or see the letters “IRS”? 

A. Refund

B. Stimulus Check

C. Taxes

D. Run

If your response was D— it’s okay. 

When dealing with the Internal Revenue Service, we’ve all experienced hints of dislike or frustration filling reports for our business. 

It’s normal.

So, breathe and take off your running shoes. 

Instead, we advise you to take a seat, so we can share how you can prevent one of the top fears of the IRS from happening to you. 

Need help preparing your books for tax time? Contact EW Bookkeeping today!

What is an IRS audit?

When the IRS audits your business, they thoroughly check your accounts and financial statements to ensure the information provided is correct and follows tax laws. 

Simply put,  they double-check your numbers to make sure they match up with your bookkeeping.

Think of a child who’s always in their room. Studying their child’s behavior, their parents are concerned and want to know what’s behind those closed doors. 

After days of investigating, the parents barge into their child’s room, look into their personal belongs and see what their child is up to.

Outside of the child’s suspicious behavior, the parents had no proven facts their child was doing anything wrong in the room, but they needed to check the room before making that conclusion.

This analogy is similar to the IRS audit. Although the tax information is provided, some of the files may not be correct so, the IRS has to barge in to see what the issue could be.

How are IRS audits triggered?

It would be a joy to tell you your business is safe from being audited. However, we cannot. In fact, no one can. It’s impossible to avoid them because the IRS system randomly selects them based on a few red flags that you should be aware of.

Red flags are suspicious reasons provided by the IRS to check into a person’s account or business. If something is flagged or looks suspicious, the IRS has legal permission to audit a person’s business to see if it aligns with the bookkeeper’s information provided. Here are three red flags that are often triggered:

  1. All of your income is not reported
  2. You’re not being specific about your income expenses
  3. You are making a considerable amount of money

How to prevent an IRS audit

Although there is no secret formula for preventing an IRS audit from taking place, here we have a few tips you can use to keep their suspicious eyes from your doorstep: 

Hire a professional accountant 

Instead of working on your own tax returns, hire a professional to do the work for you. By doing so, they may discover hidden information you overlook and provide you with more strategies on how you can receive more funds from your tax refund than initially expected.

Triple check your tax returns

To avoid the IRS knocking at your door, triple-check your files before turning in your tax returns. Make sure all of the information provided is accurate and up to date.

Create an account for all of your income

Organization is critical when it comes to filing your income taxes. It prevents red flags and shows that you carry good reports. It is wise to create separate accounts and have set files for all of the income you personally receive for yourself and your business.

File tax returns on time

In this case, time is money, and money is time. By simply turning in your tax returns on time, you take loads of stress off of you and carry a true peace of mind. Although file extensions are available, filing your taxes on time gives the IRS no reason to feel suspicious about your business or the urge to ram through your files.

Be Honest

In all you do, make sure the information you provide the IRS is correct. Make sure the numbers given are accurate and add up with your bookkeeping. It’s important to be honest and genuine during this process because the clearer you are, you will have less to worry about.

Not sure where to start with your business? EW Bookkeeping and Consulting can help! Contact us now!

In Conclusion

Overall, it’s important to stay calm, cool, and collected. As we stated earlier, no one is fully exempt from an audit, but you can prevent an audit from taking place if you keep this information in mind.

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