According to data compiled by the United States Small Business Administration (SBA), there are nearly 28 million small businesses in the country today. Small businesses are an integral part of the American economy, employing about half of the country's workforce. No one would dispute that, for the most part, these businesses are run by hard-working, honest people who are earnestly trying to comply with the thousands of pages of federal regulations that make up the country's tax code.
Sometimes mistakes are made, and even though some of them do result in an Internal Revenue Service (IRS) audit, there are ways that small business owners can lessen the chance their tax return will draw scrutiny.
What Is an Audit?
An audit begins when an irregularity is noticed in a filed tax return. An irregularity is not necessarily indicative of wrongdoing or deceit, but if something far out of the ordinary shows up on a personal or business tax return, the IRS will examine it more closely. This "second look" at a tax filing is done by an auditor, who will go through the tax return page-by-page, looking for documentation that will prove the legitimacy of an unusual expenditure, expense, credit claimed or income reported.
At that point, if the auditor is satisfied that the return has been prepared properly, it will continue to be processed as usual. If, however, the auditor notes unexplained irregularities, the taxpayer will be contacted to provide additional information, file an amended return or appear at a meeting with IRS agents.
It is important to note that having an attorney at your side when dealing with the IRS at any stage of an audit will likely make the experience less stressful for you. The presence of a legal representative could also increase your chances of a successful resolution. Civil penalties might accrue if the IRS feels that the taxpayer willfully and knowingly submitted improper paperwork, and a skilled tax lawyer could help in that capacity as well.
Keeping the Auditors Away
There are several ways in which small business owners can minimize the chances that they will face an audit. For example, tax experts have verified that business owners who use professional tax preparation software - like Quickbooks - are less likely to be audited than those who don't. It is also important for small business owners - particularly those operating sole proprietorships - to clearly delineate which expenses are for business and which ones are personal. Any commingling of funds can draw heightened scrutiny.
Small business owners should also:
- Meet deadlines for filing tax returns and submitting quarterly or annual tax payments
- Document business expenses, especially those that are unusual or unique
- Keep every receipt for seminars or conventions, an exact total for hotel/flight/rental car expenses and receipts for meals accrued in a location primarily thought of as an entertainment or vacation destination (like Las Vegas, New York or Hawaii)
- Keep a mileage log if auto-related business expenses will be claimed; it may also be helpful to keep receipts for gas and vehicle service
- If home office expenses will be deducted, make sure that there are pictures of the business area along with measurements, receipts for electricity or internet and copies of receipts for computer equipment, printer ink, paper and postage (basically, anything that will help differentiate the business area from the personal use areas)