As the IRS Audit Division comes back in full swing, so do the audit rates. Just last year, the IRS announced there would be a 50% increase in tax audits for small businesses in 2021. With 2020 behind us, it’s time for small business owners to buckle up and protect their business from falling victim to an audit that could leave you with up to six figures in tax debt. Here are some helpful strategies to keep in mind:
Separate your business and personal transactions
As a business owner, it’s crucial that all business and personal transactions are separated. Not only is this important for tax reasons, but for your bookkeeping records in general. If there are any discrepancies in overlapping transactions, they will most likely be questioned so be prepared to provide proof and explanations as needed by the IRS.
Document everything appropriately
Documentation is the name of the game when it comes to protecting yourself from audit conflicts. Having solid proof of various receipts and contracts is crucial to preventing IRS red flags. This also applies to any business deductions you’ve made as well. It’s tempting as a business owner to try and deduct as much as possible, but keep in mind, that’s exactly the type of thing the IRS will be inspecting very closely. Try to keep your deductions clear and concise when filing your tax returns.
Pay close attention when filing
Don’t rush through the tax filing process. Especially as a small business owner, having everything prepared properly and completely on the correct forms, is the best way to ensure you will avoid an IRS audit. Consult with a tax professional before you file to make sure you have a second pair of eyes on all of your important documents and to give you any last-minute advice. Keep in mind any COVID relief that your business received in 2020 must be appropriately accounted for. This would be a prime example of something you’d want a professional to double-check for you to ensure there are no errors or missing forms that go along with the additional relief your business received.
Keeping up with your tax documents and forms can be overwhelming which is why we’re here to help your small business in any way we can. We offer a variety of financial services including accounting, bookkeeping, tax planning, balance sheet preparation, payroll services, and more. Feel free to contact us at 410-224-2600 and don’t forget we’re also offering virtual appointments. Book yours today!