Best Way to Fight a Tax Audit of Your Small Business
A tax audit is one of the most overwhelming things a small business owner can face. If you’ve been audited, you might be wondering what you can do to fight it. Let’s take a closer look at the best course of action, as well as what triggers the investigations in the first place.
What’s the Best Tax Audit Defense?
If you’re wondering what you can do to fight a probe by the IRS, the best option is to hire a professional tax audit defense team. These certified accountants and professionals can help you navigate the stressful process of an audit. They will help you determine what document(s) you need to prove your case and will work with the auditor on your behalf to help ensure you come out on top.
What Triggers Small Business Tax Audits?
There are certain mistakes small business owners make that can flag an audit. When filing business taxes, it’s important to be aware of the potential tax audit triggers.
Misreporting Your Income
One of the biggest small business tax audit triggers is reporting an income that’s significantly higher or lower than the previous year.
If your income did drastically change from previous years, that’s okay. The most important thing is to always be honest about your business’s income. You should be able to provide financial statements and any other documentation that proves your income did change.
Reporting Frivolous Business Expenses
There’s no doubt that every business has a lot of expenses. The cost of inventory, new laptops or office supplies, work-related vehicles, and marketing are all legitimate expenses.
But if you’re reporting every meal you eat on a daily basis as a business expense, it may raise red flags for a tax audit. Although you can report meals as business expenses, you must be able to provide documentation of the time and location of the meal, as well as how it relates to your business (e.g. a business meeting).
Travel expenses are also more likely to be flagged. You should be able to provide proof of location and how it relates to your business. It’s also important for the majority of your trip to revolve around work.
When it comes to business expenses, be sure to do your research ahead of time and talk to your accountant or tax preparer. Make sure you have appropriate proof of how the expense applies to your business. If you don’t have valid proof, then don’t write it off as an expense.
Having a Business That Does Cash Transactions
If you have a small business that frequently does cash transactions, there’s a chance that it could get flagged for an audit. The IRS will want to investigate to make sure that cash isn’t being underreported.
Some examples of businesses that are higher audit risks include restaurants, bars, food trucks, coffee shops, farm stand vendors, laundromats, auto services, and beauty salons. If you own these or any other type of business that deals with a lot of cash transactions, it’s important to keep good records in case of a future audit.
Claiming Losses Every Year
In reality, many small businesses do have losses. However, if you report losses many years in a row, this can trigger a tax audit. The IRS may begin to wonder if you have a legitimate business or if something shady is going on behind the scenes. Make sure you save documentation to prove profits and losses.
Fighting a tax audit for your business can be stressful, but hiring a seasoned professional can make the process go a lot smoother. The main goal should be to take steps to help reduce the risk of triggering an audit in the first place.