An audit by the Internal Revenue Service is one of every taxpayer’s deepest fears. An audit takes place when the IRS decides to closely review your accounts to ensure that your small business is properly following tax laws. Although they aren’t extremely common, it’s best to err on the side of caution. The following are important points to check for as you review your tax forms.
Although it may seem obvious, make sure that the sum of your credit card receipts aligns with the figure on the 1099-K. The IRS will absolutely check the math on your returns, so it’s imperative that you enter the correct numbers. Even though most tax returns these days are performed electronically, it’s still a good idea to double check everything. Remember that your signature on your tax form signifies your responsibility for all of your numbers and math!
Rounding Down Cash Transactions
Don’t underreport your cash transactions! Don’t fall into the trap of assuming that because there’s no digital trail, the IRS can’t track the money. Credit card processors now submit a record of the total credit card transactions your business processed for the year to the IRS. They then use a secret algorithm to calculate how much cash your business should have brought in. If you report your cash sales at an amount lower than the calculated amount, you’re at risk for an audit.
Using Round Numbers
Using too many round numbers can appear suspicious. If all of your numbers end in two zeros, the IRS may suspect have you don’t have proper documentation for all your expenses. The IRS is looking for very specific numbers, and having too many perfect ones could be a factor in triggering an audit.
Too Many Deductions
As a small business owner, you have to be especially careful when determining your deductions. Be overly cautious when deciding which meals and travel expenses you write off. Remember that the IRS states that an expense must be “ordinary and necessary” in order for it to qualify as a deduction. Make sure that you’re consistent in your spending. Too many deductions is a red flag.
Donating Large Amounts To Charity
If you suddenly start donating significant amounts of money to a charity, the IRS may become suspicious. Some businesses donate money solely for the purpose of avoiding paying taxes on it. This action is in violation of the tax code.
By avoiding these mistakes when you file taxes and document your expenses, you don’t have to fear an audit by the IRS.