Everyone knows that a call from the Internal Revenue Service is nothing to smile about. They’re not calling to reward you money or tell you that you qualified for more tax deductions than what you’ve claimed on your tax return. More than likely if your business gets a call, a letter or a notice from the IRS, you are being audited. A tax audit is when the IRS scrutinizes your business for false or inaccurate reports. This sounds scary, especially as this scrutinizing audit may often result in tax debts owed the IRS and associated penalties; but there are ways you can avoid a tax audit.

The foremost reason for IRS audits on a business is an inaccurate tax return – a tax return that was not properly prepared. In this situation, the IRS noted discrepancies in your reported data. In their attempts to find people who are trying to evade taxes by misreporting, misrepresenting, or hiding information, the IRS flags discrepancies to investigate whether income, expenses, and credits were indeed reported correctly, and to determine whether there is fraudulent behavior.

To determine this information, auditors may want to meet with you, or request specific documents like receipts, bank statements and other proof of the income and expenses you claimed on your tax return. If the IRS finds unreported income, or cannot obtain proof of some of the expenses you’ve claimed, they will adjust your tax return to reflect this discrepancy and the next thing you will be getting is a bill.

Another common reason for an audit is large amounts of itemized deductions, especially those that exceed the average amount for your income. Let’s say your business is very involved in the community and often makes very big charitable donations, by way of money or goods. When you claim these tax deductible donations and the amount does not seem to match up with your income and other expenses, you are liable for a tax audit. If your business makes big donations to charity, you should keep meticulous track of your transactions. Notate the date of the donation, the name of the charitable organization, and the amount being contributed. Make the donation by check so that you can make a record of the money being donated and file your receipt, especially if the donation is more than a couple hundred dollars. If your donations are non-monetary, as in the case of goods, then be prepared to provide accurate assessments of their original and fair market values.

There are other reasons why the IRS may select your business to audit, such as suspicious offshore financial accounts or misrepresented stock and bond purchases and sales, or a host of other, less common reasons. But if you are not partaking in any kind of fraudulent behavior, more than likely, you have been selected because your tax return was done incorrectly. This is something that can be easily avoided by having an expert take care of your tax matters for you. A PASBA small business accountantis more than qualified to handle your business taxes. He or she can determine what kinds of taxes, and how much, you are required to pay, and obtain the correct forms for you to fill out. Your small business accountant will know the ins and outs of the tax filing process and will know what to put on the paper as it relates to your specific and individual financial situation. Proper payment of your taxes, and filing a precisely accurate tax return will prevent that big knock on your door.

Improper bookkeeping is another culprit of an inaccurate tax return, as the data needed to file your return will come from the records that you have been keeping. If that data is incorrect or incomplete, then your tax return may reflect that. 

By investing in the service of a good bookkeeper and business accountant, you can avoid a tax audit, and generally keep your financial state in good standing.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants,  Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice.  Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Copyright Information 2011 Professional Association of Small Business Accountants