Let's face it, tax laws are complex enough. Add to that the fact that this past year saw even more complications with the COVID stimulus packages, PPP loans, and other forms of emergency relief, and businesses' books are even more complicated than in previous tax years. While the deadline to file has been extended this year to May 17, thereby allowing small businesses more time to gather together their documentation and make heads or tails of their books, the situation as far as the IRS is concerned could potentially get a bit tricky. In response, the IRS is adding more auditors to its docket to help the department more efficiently stay on top of things.
Many experts warn that those businesses which could be hardest hit by the move to add more auditors are smaller, those family-owned operations, and online businesses—many newly launched in response to a prolonged quarantinelockdown period. The plan is to have more auditors in place by this spring in anticipation of what is to come when tax time arrives. The key moving forward, according to the IRS, is also to have those auditors crackdown on incorrect tax return practices and thereby ramp up efforts to enforce the laws. Penalties and fines could definitely (and most likely will/) come into play as far as 2020 taxes go.
As many small businesses are still struggling to get back on their feet following the events of 2020, the news of more auditors on board is not necessarily welcomed the news. Many small and online business owners are downright fearful of what could happen should their company be audited for the 2020 tax year.
So what can you do as a small business owner to help safeguard your company against a potential audit? How can you secure your business interests and of course, avoid that dreaded IRS audit? Below are a few strategies business owners might employ to help prevent an audit of their organization's tax returns.
Strategies To Help You Avoid an IRS Audit
Stay on top of record-keeping: Perhaps no other piece of advice is as important as this one. Having accurate, timely, and detailed records are going to enable you to stay organized and on top of exactly where all financial matters stand. When you complete your tax return, a more organized and streamlined record-keeping system will help to prevent errors or inaccuracies on that return. Not to mention, beyond keeping you organized and on top of things, proper record keeping ensures that you do have the documentation accessible and ready to go should an audit occur.
Be careful of certain deductions: A major red flag that can often signal an IRS audit is deductions that seem out of the ordinary or in some way excessive. Many small business owners will take the standard deduction—this can help you to avoid an audit. However, if you do opt to itemize your deductions instead and are deducting a significant amount of items that don't necessarily coincide with your business operations, the IRS might very well decide to audit your company. Also keep in mind that if you record too many business losses and continue to do so for three or more years, this could lead to an audit of your business.
Make your estimated tax payments: Basically, most businesses are going to have to make estimated payments. These are quarterly payments made throughout the year (April, June, September, and January/) to the IRS in anticipation of what you are going to owe for that year. If you fail to make your estimated tax payments, this again could be another red flag to the IRS and lead to an audit come tax time. If you underpay, there are likely going to be penalties associated when you do file your income taxes.
Use accounting software/platforms: if you are still managing your company's booksfinances the "old school" way, you're only making things more difficult on yourself. Today there are numerous platforms and bookkeeping software for example that make record-keeping that much easier. Plus, with everything accounted for electronically, you are less prone to human error. And if your business should be audited, it is much easier to supply the documents and figures necessary when asked. If you work with an accountant to file your taxes, having an electronic/digital bookkeeping system in place also makes their job much less tedious and could save you some money in the long run.
Know how your entity is taxed: Different business structures are taxed differently. A sole proprietor is going to be taxed in a different way than a C Corp will. Doing a bit of research here and understanding exactly how your business entity type is taxed and the rules and regulations associated, will give you a better overall handle on what you need to do come tax time. It should also influence how you keep records and maintain financial accounts.
For many small businesses, coping with taxes, and especially in light of what happened in 2020, it generally makes sense to enlist the help of a certified accountant or accounting firm. They make it their business to stay on top of tax laws, changes, and also the effects of COVID bills on business taxes. This is going to be new territory for many organizations in the US. And now with the number of auditors set to increase, things could get even more difficult for many entrepreneurs around the country. If you can afford to work with a CPA, this is without question going to be the smart move.
First Union Lending is here to help. We understand that the situation for many companies is difficult right now We have fast and flexible loan programs that can get you additional capital to help you weather this storm. We want to see our clients survive and come out of this thriving. If you need more cash for any reason, we would love to consult with you. Call today!