Did you know that IRS audited about 0.45% of tax returns in 2019? If your business received a normal tax return from the IRS and it was audited anyway, the agency made a mistake.
Most audits are caused by honest mistakes. IRS auditors must process millions of tax returns for thousands of businesses. With so much data to review, some information may be missing.
There are techniques small business owners can use when it comes to IRS auditing. To learn five of the most effective audit slipping tips, keep reading.
Table of Contents
1. Keep Accurate Records
One of the most important tips for small businesses when it comes to IRS auditing is to keep accurate records. This includes everything from receipts and invoices to bank statements and tax returns. By having a complete and accurate record of your income and expenses, you’ll be able to avoid any potential problems down the road.
2. Don’t Try to Hide Anything
The most important thing to remember is that the IRS is not trying to hide anything from you, so do not try to hide anything from them. Be honest and upfront with the IRS about your financial situation and do not try to hide any assets or income. This will make it much easier to prove to the IRS that the deductions are legitimate and will help to avoid any penalties.
3. Be Cooperative
It’s important to stay calm and cooperate with the IRS. They’re just doing their job, and chances are they’re not out to get you. If you cooperate and provide the information they need, the process will go much smoother and you’ll be back to business as usual in no time.
4. Be Aware of Red Flags
One common red flag is inconsistent or incomplete information on tax returns. This can include failing to report all income, overstating deductions, or claiming personal expenses as business expenses.
Another red flag is a sudden large increase in income or deductions. This can be a sign that the taxpayer is trying to reduce their tax liability by artificially inflating their numbers.
The IRS also looks closely at taxpayers who fail to file their taxes on time or who have a history of filing amended returns. This is because these taxpayers are more likely to make mistakes that could result in an audit.
5. Be Familiar With the Advance Pricing Agreement
Many small businesses are unaware of the Advance Pricing Agreement (APA) program offered by the IRS. An APA is a voluntary agreement between a taxpayer and the IRS that establishes the pricing methodologies to be used in future transactions between the taxpayer and its related parties. The APA program provides certainty with respect to the transfer pricing of related party transactions and can be used to avoid or minimize potential double taxation.
Being Prepared for IRS Auditing
If you’re a small business owner, the IRS auditing process can be daunting. But by following these five tips, you can make the process a little easier. Be prepared, organized, honest, and cooperative, and you’ll be on your way to a successful audit process.
If you find yourself in the middle of an IRS audit, don’t panic. Follow these tips, and you will be on your way to resolving the issue.
If you enjoyed this article, check out our other business content for more tips and advice.