If you own a small business, the likelihood that your business undergoes a tax audit is small. If the Internal Revenue Service does select your business for an audit, there are certain things to be aware of to ensure the outcome is favorable.
The IRS uses a discriminant index function. The DIF is how the IRS determines if a business is a candidate for an audit. A high score means a business is more likely to be selected. A small business that has any connection to another business that’s undergoing an audit may be chosen for an audit. Business and individual tax returns are compared by the IRS and may be the cause for an audit.
Ensuring a Successful Outcome
If your small business is selected to undergo a tax audit, there are certain steps you can take to ensure that the outcome for your business is positive.
1. Calculating Deductions
If you no longer have documentation of expenses you’ve previously deducted on your tax return, there are ways to get documentation. Check past bank or credit card statements to find out if the deductions are valid business expenses. Keep and references invoices or client records to verify any expenses, in the event of an audit.
2. Seek Professional Tax Assistance
You can get a tax professional to act on your behalf. You can also give that person Power of Attorney so they can deal directly with the Internal Revenue Service. Designating an agent to handle the process takes a lot of the stress off you and your employees.
3. Claim Deductions You Missed
A lot of small business owners don’t take advantage of tax deductions they may claim. If you haven’t been taking advantage of certain tax deductions, you may be paying more. Among the business deductions you may take advantage of are:
- Mileage for business
- Mileage for medical reasons
- Contributions to charities
- Home office expenses
4. Hobby Loss
The Hobby Loss Rule concerns profits from a small business and whether the deductions that the business owner claims is from business profit or a hobby. In this case, the business owner must prove prior success or losses. If the business has a marketing plan, there must be a detailed document of the business plan.
By keeping accurate records and following these tips, you may avoid an IRS tax audit. If you do undergo an audit, you are more likely to have a positive outcome.
Author: Emma Sturgis is a freelance writer living in Boston, MA. She writes most often on small business and education. Information used in this article was provided by Ben Mallard, a small business owner with a Bachelor’s degree in Business, who provides new entrepreneurs with tax and financial management advice.
Published: November 7, 2014