One of the biggest fears of a business owner is dealing with an IRS audit, because it adds undue stress and a lot of work to gather the necessary information for the auditor. If you want to prevent an audit, then it is a good idea to follow these simple tips to ensure that your finances are handled correctly:
- Report All Income
Failure to report income is a big red flag and you shouldn’t assume that you can get away with leaving a few things out. Make sure that you keep detailed records and accurate numbers to ensure that everything lines up. Don’t round the number or make estimations, because the IRS will be able to tell if your records don’t match up with the client’s reporting.
Always be prepared, even if you don’t think that you will be audited. Be sure that you are journaling your mileage and expenses, and hold onto receipts to back up the deductions. If the auditors see that your finances are a mess, then it is likely that they will dig even deeper to uncover all of the problems.
- Avoid Excessive Deductions
If you are deducting high amounts for business entertainment, travel, and meals, then it could potentially catch the attention of the IRS. Keep all receipts for these types of deductions, and make sure that you record details about the meetings and notes on the purpose of each expense.
- Stay Up-to-Date with Estimated Taxes
Missing tax payments is a big problem, so you need to be sure that you are paying estimated taxes when they are due. Always pay on time, and make sure that you are working closely with your accountant to ensure that you are paying the right amount.
- Manage Your Business like a Business… Not a Hobby
Don’t make the mistake of treating your business like a hobby, because you need to take the financial reporting seriously. If you have been in business for several years and you are reporting losses every year, that raises a red flag with the IRS. It’s all right to have a few losses along the way, but a trend of losses could subject you to an audit. Plan to show the IRS the evidence and expect an audit if the business isn’t bringing in profits for at least three out of five years.
- Hire a Professional Accountant and Bookkeeper
There are many common mistakes made along the way, and most business owners don’t understand business finances well enough to prevent these problems. Staying proactive with your business tracking, reporting, and tax forms is essential to help you avoid an audit. Outsourced bookkeeping services are beneficial to help you keep track of everything, and an accountant can assist you to ensure that everything is completed throughout the year.