The word “audit” is one of the most frightening in the English language for a business owner or individual. The prospect of the IRS taking an in-depth look at their finances is enough to give anyone anxiety.

Only 0.70% of individual tax returns were audited in 2016, but the odds of being examined increase rapidly with higher income, with schedule C income, and with numerous and large deductions. For businesses, audits are closely tied to revenues, with smaller companies being audited far less often than larger ones. An exception is small companies that consistently fail to report a profit. The IRS looks at these companies fairly often to determine if income is being hidden, expenses overreported, or if the “company” is really the owner’s hobby.

Even if the size and nature of your business make it a likely prospect for an audit, there are some steps you can take to eliminate “red flags” that will increase the chances in any given year. Sometimes, you may have to bite the bullet, but you want to keep those times to a minimum.

Keep Good Records

If you don’t keep good records, you’re in danger of forgetting to report all of your income. The IRS gets copies of all the 1099s and W-2s that are applicable to your situation, so you need to keep track of these and report all required income.

Keep good records of expenses too. If you pay cash for anything, always get a receipt. If you claim mileage on your car, log every trip: where you went, who you met with, and the purpose of the meeting. If you claim deductions from your personal income for charitable donations, get receipts there too.

Keep all your records organized and keep them in a safe place. If you are audited, you’ll need those receipts to prove your expenses or deductions. If you can’t prove them, they’ll likely not be allowed.

Don’t Go Overboard on Deductions

Think the IRS won’t notice if your deductions aren’t appropriate to your income? Think again. The IRS is always on the lookout for discrepancies, so be careful about what you claim. Large deductions for meals, travel, and entertainment are always a red flag. Of course, if you have proper documentation for your deductions, you should claim them. You are entitled to whatever deductions the tax code allows, even if you have to prove it.

Follow the rules. The amount allowed for mileage on your own car changes; make sure you apply the appropriate amount. For business entertainment, you’re allowed to deduct only 50% of the total. These are just a couple examples. It requires virtually full-time attention to the US Tax Code to stay current and know what you can deduct, and how much. (Guess who pays nearly full-time attention. Answer? Your accountant!) 

Choose a Tax Preparer Wisely

If you think you can prepare your taxes yourself and save the money you’d otherwise spend on a professional, you might want to reconsider. Self-prepared returns are usually studied more closely by the IRS for discrepancies and, if you don’t know what you’re doing, you could get yourself into big trouble. It almost always pays to hire a professional who can walk you through your return and help you make reasonable decisions about deductions, expenses, and other issues.

When choosing a tax preparer, ask about their certifications and experience and request references for people or businesses they’ve worked with in the past tax year.

Taxes and the possibility of an audit don’t have to be scary. When you work with a professional tax preparer, you can reduce your chance of being audited and get through your tax return efficiently. If you have questions about taxes or would like to work with our professional staff in Millville, NJ, please contact us.