Preface: Tax audits are low risk if you’ve prepared beforehand with a tax accountant who understands what is and is not a tax categorical exclusion; nevertheless, audits are most business owners top tax concern.

 

Avoiding Tax Audits

 

Rule Number One of minimizing tax audit risk is to file a complete and accurate tax return. Rule Number Two is never forget Rule Number One. Today, the IRS has data mining software that analyzes your financial habits and transaction history; and unearthing tax fraud is only becoming increasingly easier for the Internal Revenue Service (IRS). For instance, with software, depending on the business industry, the IRS can determine estimated gross revenues from a water bill, and use net income averages to determine the accuracy of your tax filing.

 

Saying you strive to file a complete and accurate tax return is not to say that you won’t be audited, but that you have little to be fearful of. The IRS uses an audit guide called Market Segment Specialization Program or MSSP. Market Segment Specialization Programs provide guidelines on what level of income your business should report as taxable income. If you are involved in an audit, it is vital to have a tax professional involved who can research the Internal Revenue Code compared to the MSSP parameters the auditor follows, to provide you with the optimal tax audit result. The MSSP is an audit guide and not tax code.

 

Guidelines to Minimize Audits

 

Avoid tax shelters. If the IRS sees form 8271 Investor Reporting of Tax Shelter Registration Numbers your tax audit risk increases. However, if audit representation is not a concern for you, you should still take measures to ensure your tax filing is accurate and complete.

 

Avoid talking about your tax filing with anyone but your tax advisor. You cannot determine the construing of your tax strategy conversations today or in the future.

 

Document each expense with filed receipts and accurate financial records. If you have a vehicle in your business, keep meticulous records of mileage and fuel expense. If you purchase assets for a depreciation expense, keep records of invoices to document basis. If you contribute either in your personal name or business name to charitable organizations, e.g. your church, non-profit organization(s), document each donation with a receipt, whatever the amount. Each receipt should read “No goods or services were received for this donation.” Keep these receipts and copies of canceled checks until the risk of audit is passed on your tax filing. If your donations exceed two to five percent of income a year, your tax filing may be flagged for an audit of charitable contributions, and you should be prepared with proper documentation.

 

Always file 1099’s. 1099’s verify the expense of non-employee compensation, rents, interest, etc. If you file a 1099 you have a document that validates your expenses for services in excess of $600 dollars, or interest of $10.

 

A good bookkeeper can simplify your tax filing and can simplify an audit too. If an auditor requests a general ledger of accounting activities and there are unexplained journal entries or debit and credit mystifications, a simple verification audit could turn into a project.

 

Although a professional tax advisor’s fee may not be inexpensive, depending on the latitude of your business, you would be well advised to defer representing yourself in a tax audit. Working with a knowledgeable tax expert who has experience dealing with the IRS can assist you in avoiding compromising tax audit situations, and can provide a cushion of comfort.