Don’t Want Your Business to be Audited? Avoid these 5 Practices.
June 1st, 2016 by Justin Sadler
If you asked a hundred business owners what sentence scares them the most, don’t be surprised if the top answer is, “Your business is being audited by the IRS.” Few other phrases strike fear into the heart of entrepreneurs in quite the same way. Maybe “Your storefront is on fire,” comes close, but even then I think most would say that an IRS audit is more frightening. Rather than walk you through the steps to take if you’re being audited, we’re going to discuss 5 practices to avoid if you don’t want to be audited in the first place. We think it’s safe to say that most small business owners would much rather avoid the audit altogether.
If you’re a cash-heavy business, take extra care.
Countless business rely on a great deal of cash, but we’re talking specifically, businesses that involve heavy tipping, like restaurants, barbershops, valets, etc. Businesses handling large amounts of loose cash, especially when it involves large quantities of small bills, are extremely likely to under-report taxable earnings, typically due to it being difficult to do so. The IRS is wholly aware of this, and will always keep a closer eye on these businesses. The best piece of advice we can offer is that you can never take accounting too seriously. Every cent must be accounted for when cash is in high quantities, entering and leaving your business.
If you’re a habitual late-filer, the IRS has got its eye on you.
Nothing snags the attention of the IRS quite like being a late tax filer. If you’ve established a history of reporting your business’ taxes after deadlines have passed, don’t be surprised when the IRS decides to keep a close eye on you. Any mistake or error will fall under much greater scrutiny. Thankfully, the solution here is simple: file your taxes on time. This is easily one of the most avoidable attention-getters.
If you do a lot of charitable donating, do so with full transparency.
One of the most used forms of tax abuse involves shifting revenue to charitable organizations in an attempt to avoid taxes. If your business does a lot of charitable donating, make sure your records show clear purpose and intent. Otherwise, it may appear to the IRS that you’re only shifting funds to avoid taxes, which as we stated constitutes tax abuse.
If you’ve reported multiple years of losses in a short timeframe, expect an audit.
This typically isn’t in the complete control of a business owner, but generally speaking, if you’ve reported losses for at least two years over a five to six year timeframe, you’re going to get audited more often than not. If this applies to you, it’s a good idea to begin audit preparation sooner rather than later.
If you have a business-use vehicle, track mileage carefully.
Realistically, there are extremely few instances of a business vehicle’s mileage being completely attributed to business use. Even if your business vehicle’s mileage is 90% business use, that 10% needs to be accounted for and taxed appropriately. It’s a large red flag to the IRS to claim 100% of a vehicle’s use as business related, so avoid that at all costs. The best deterrent is to track mileage carefully.
Keeping these 5 topics in mind at all times will do a great job of helping avoid a dreaded IRS audit. However, nothing can completely remove the possibility of an audit. You can do absolutely everything right, and still be audited. Should the IRS come knocking at your storefront door, don’t hesitate to give us a call at Sadler Accounting. We work as your outsourced CFO in order to give you the peace of mind that comes with not having to worry about taxes, the IRS, or audits.