No one wants to go through an audit. Just the word “audit” forms a pit in your stomach and causes you to cringe. Audits are time-consuming and costly.
Avoiding an audit should be a concern of any business owner. While there’s no way to guarantee you won’t be audited, there are steps you can take to avoid triggering an audit.
9 Things to Do to Avoid an Audit
1. First and foremost, PAY YOUR TAXES!
Make quarterly estimated tax payments and always be sure to pay your payroll taxes. File your annual taxes on time and make your tax payments.
2. Issue 1099s and W2s on time.
These are both required to be filed and remitted to employees/contractors no later than January 31. Filing these late is a red flag to the IRS.
3. Don’t mix business and personal.
Many small business owners try to deduct travel, vehicles, cell phones, etc that are not truly business. While some of these might be legitimate business deductions, be sure you understand the rules surrounding these “fuzzy” deductions.
4. Pay officers/owners a reasonable salary.
Do not inflate salaries for officers or owners of small businesses. Inflated salaries will trigger the IRS to take a closer look. On the flip side, low salaries for business owners are also a red flag. The IRS requires that business owners pay themselves a “reasonable” salary for their work in the business. Your CPA should help you decide what “reasonable” looks like for your business.
5. Be very careful of travel and meals.
Only true business travel and meals should be deducted. This is a hot topic for the IRS. Excessiveness in this area will trigger an audit.
6. Only deduct your home office if you meet the criteria.
This is a particular topic that the IRS will focus on. Remember that your home office must be a dedicated space that is used exclusively for business. A dining room table does not qualify.
7. Do not show a loss year after year.
This becomes a yellow flag if you continue to show a loss for multiple years in a row.
8. Be very careful of treating labor as a contractor vs. an employee.
If you are paying people with 1099 wages as a contractor but they should be considered an employee, you are sending flags to the IRS and to your State tax agencies.
9. Keep a clear, accurate, and timely set of books.
Use bookkeeping software and ideally, a professional bookkeeping and financial services provider.
While there is NO guarantee that you will not be audited, following the above guidelines will help. Keep your business running smoothly by taking steps to avoid the disruption of an audit.