As a small business owner, the prospect of an audit can be daunting. The thought of an auditor poring over your financial records can be overwhelming, but it doesn’t have to be that way. With some preparation and planning, you can reduce your audit risk and avoid the red flags that often lead to an audit.

Here are some tips and strategies for small business owners to avoid costly tax mistakes and reduce their audit risk.

Keep Accurate Records

One of the most important things you can do to reduce your audit risk is to keep accurate records. The IRS requires you to keep records of all your income and expenses, so you need to make sure that you have documentation for all transactions. This means keeping receipts, invoices, bank statements, and other financial records.

Keeping accurate records not only helps you avoid an audit, but it also makes it easier to file your taxes. If you have organized records, you can quickly and easily prepare your tax return, and you’ll be less likely to make mistakes.

Avoid Common Mistakes

There are several common mistakes that small business owners make that can trigger an audit. These mistakes include:

a. Failing to report all income: The IRS receives copies of all the 1099 forms that are issued to you, so it’s important to report all of your income. Failure to do so can trigger an audit.

b. Claiming too many deductions: Deductions can be a great way to reduce your tax liability, but claiming too many can raise a red flag. Make sure you only claim deductions that are legitimate and supported by documentation.

c. Failing to file on time: Failing to file your tax return on time can lead to penalties and interest charges, and it can also increase your audit risk.

d. Mixing personal and business expenses: It’s important to keep your personal and business expenses separate. Mixing the two can lead to confusion and increase your audit risk.

Get Professional Help

Working with a tax professional can be a great way to reduce your audit risk. A tax professional can help you identify deductions that you may have missed and can provide guidance on record-keeping and tax planning.

Make sure you choose a reputable tax professional who has experience working with small businesses. Ask for references and check their credentials before hiring them.

Use Software to Track Expenses

Using accounting software to track your expenses can be a great way to reduce your audit risk. Many accounting software programs can help you categorize expenses and generate reports, making it easier to keep accurate records.

Make sure you choose a software program that is user-friendly and has the features you need. You should also make sure that the software is compatible with your accounting system.

Review Your Tax Return

Before submitting your tax return, take the time to review it carefully. Make sure that all of your information is accurate and that you have included all necessary documentation.

If you have any questions or concerns, reach out to a tax professional for guidance. It’s better to get advice before you file than to have to deal with an audit later.

Don’t Panic if You’re Audited

If you are audited, don’t panic. The audit process can be stressful, but if you’ve kept accurate records and have followed the rules, you should be able to get through it without too much difficulty.

Make sure you respond to all requests from the IRS in a timely manner and provide all requested documentation. If you have any questions or concerns, reach out to a tax professional for guidance.

Conclusion

Reducing your audit risk as a small business owner requires careful planning and preparation. By keeping accurate records, avoiding common mistakes, working with a tax professional, using software to track expenses, and reviewing your tax return before filing, you can minimize your risk of being audited.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule a discovery session here, and we’ll be able to address these issues and much more! We’re looking forward to opening many more doors for you!

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This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed.