Small businesses are extremely susceptible to tax audits. Most of time, this is because small businesses will do whatever they can to reduce their annual taxes. In a competitive world, it can mean the difference as to whether that business survives or doesn’t. However, while small businesses want survive, they also want to prevent a dreaded tax audit. Some of the main reason’s small businesses are specifically triggered by the IRS include claiming too many business expenses that seem personal or claiming personal expenses disguised as business expenses, over claiming entertainment expenses and simply being registered as a sole proprietor. Yet, there are a number of ways for businesses to avoid a tax audit.

  1. One of the biggest red flags for the IRS is an over abundance of personal claims on your filing. Separating business from pleasure is one of the most important things a small business can do on their tax forms in order to not raise the suspicions of the IRS. For instance, while it might be easy to write off your recent vacation as a business expense as “inspiration” – you want to be careful that this is not seen as suspicious. This is the same for office furniture and rent for many small businesses that run their companies out of their homes.
  2. You also don’t want to mix up your business vehicle and person vehicle expenses. If you only have a personal vehicle, you can only write off these expenses if you are traveling to work and not from. You can also write off fuel that has been burned only in transit between business meetings. Not having too many vehicle expense write-offs will help you avoid a tax audit.
  3. Businesses should always have detailed lists, either electronically or written down, of all the cash their business takes in. The IRS is very strict about businesses that take only cash, because it is easy to hide revenue. You can ask about some of the best ways to write off and record income from cash only transactions.
  4. Small businesses can also avoid a tax audit by not writing off so many entertainment expenses. While it might be easy to write off all your dinners, maybe even groceries, and movie going trips, it might raise a few eyebrows at the IRS. You want to make sure you only write off entertainment expenses accrued only by the business, like client dinners and hotel accommodations.
  5. Don’t underestimate the intelligence of the IRS. Always report your revenue accurately. The IRS will know exactly how much, on average, your business makes each year. It is their job to compare your claims with their averages to see if you might be missing a few things. Ask your accountant what percentage you can write off of certain categories before it starts to raise red flags. If you want to avoid a tax audit from the IRS you should also keep detailed and organized lists, receipts and expense reports, so that you can accurately write off expenses. At the end of the day, a clean tax balance is good for business and your bottom line.

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