Tips to Avoid an IRS Audit

One of the scariest events for small business owners is receiving notice of an IRS audit. Even though we work hard to keep our business records up-to-date and accurate, the concept of an audit creates fear. Questions jump into our mind:

• Did we forget anything?
• Did we miss anything?
• Did we record our transactions properly?
• Do we have supporting documentation for our expenses?

While there is no perfect method for avoiding an audit, by taking the following steps, we can limit the possibility. Worse case, we can make an audit as pain-free as possible. 

• Exercise care in choosing your tax-return preparer. The IRS has tax-return preparer regulations. This permits easy identification of preparers who frequently compile returns that fail IRS audits. That increases the audit potential for every return of such preparers.

• Carefully gather complete tax information. The IRS compares figures on your tax return to W-2s, 1099s and other reporting by payers of income to you. Make sure your tax return matches these information reports. 

• Don’t estimate any figures. Don’t use rounded-off amounts. Take the deductions you are entitled to report, but be prepared to justify them with accurate records. The IRS uses a discriminant function system score to select returns for audit. This compares amounts you claim for specific deductions to the statistical averages for your income level. Any large deduction relative to your income might require response to an IRS audit with proof of the amount.

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• Ensure your state income tax return is accurate. If you’re audited by a state and owe additional tax, an IRS audit is likely to follow. The IRS maintains information-sharing agreements with every state.

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​An IRS audit can be a time-consuming and frustrating process if books and records are not in order. If you need assistance with cleaning or catching up your books and/or to set up processes to avoid future bookkeeping issues, please contact us now for a free consultation.