Tax Audit. Those two words strike fear in the hearts of many taxpayers. but as with many things an ounce of prevention is worth a pound of cure. Here are 7 tips to avoid getting audited.
1. Keep good records — include details for income, expenses, debts and deductions and keep them for 7 years.
2. Omissions may make the IRS double-check a tax return therefore make sure it is completely filled out AND signed before submitting it.
3. Be sure the income on your tax return matches the income indicated on every 1099, W-2 and K-1 . The IRS gets a copy of every 1099, W-2 and K-1 you receive and their computers will pick up on reports that do not match exactly.
4. Don’t change or mesh cash and accrual accounting methods. A combination of cash and accrual methods, or changing accounting methods is sure to attract attention.
- Remember you need IRS permission to change accounting methods.
- Remember if you sell inventory you are almost always required to use an accrual method to account for it.
5. Classify employees and independent contractors carefully. An independent contractor can ask for a review to be treated as an employee and many do so to reduce their self-employment tax by half. If you do not have a contract with an independent contractor, the IRS may claim they are an employee and assess back payroll taxes.
6. Co-mingled books make auditors drool. Although there is no specific rule for Sole Proprietors regarding co-mingling expenses and income — DO NOT co-mingle business and personal accounts — it makes it very easy for the auditor to suggest a given expense is a personal rather than business expense OR to concluded that a given deposit is business income as opposed to something else.
- Have separate accounts bank accounts, credit cards, etc. and keep your personal and business receipts and other records separate.
- Keep a contemporaneous log of vehicle mileage & expenses.
- If you have a home office keep the work area separate, use it exclusively for business and document it.
- If you piggy back vacation and business deduct only expenses related to the business portion of the trip.
- If you plan on taking 100% deduction for any listed property expense: automobile, cell phone, computer equipment and entertainment devices, you had better be prepared to back that claim up; combining a business trip with a trip to a grocery store even once is enough to violate 100%.
- Remember there is no deduction for Meals & Entertainment expenses that are not documented-keep your receipts and annotate them if required.
- Treat your company as you would treat any other separate business relationship — keep all transactions at arm’s length.
7. If your taxes are complex hire a reputable tax preparer or learn to use tax software. Although you are ultimately responsible for any tax return you sign, you may avoid mistakes if you obtain professional assistance; in the event a mistake does occur relaying on an expert’s advice may help you avoid penalties.
As always, small business services and taxation are our business. If you need help Please give Art & Business Consulting a call. We would love to engage you as a client.
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