When you’re the owner of a small or medium-sized business, the last notice you’d want is an audit letter from the Internal Revenue Service (IRS). Audits are defined as detailed examinations of an individual or business’s finances to prevent tax fraud and related issues. Below, learn what factors increase audit chances and what you can do to prepare for yours and ensure tax compliance.

Contributing Factors

The IRS issues audits for several reasons, such as excessive charitable donations. If your small business made $150,000 in 2019, for example, claiming $70,000 in donations looks suspicious since this would imply you kept less than half of your profits.

Excessive expenses and losses raise suspicion as well, such as claiming $20,000 in office supplies when your business employs three people. Another alarming loss can include writing off personal items as losses, so be honest about your donations, losses, and expenses to avoid audits.

Other common audit reasons include rounding to the nearest hundred instead of the nearest single dollar amount when you’re listing expenses or other deductions. For instance, business expenses that total $1,245.55 look much more credible than costs totaling $2,000.

An audit can also be requested if you did not report all of your income, or you made simple math errors. This can include leaving a zero or two off of your adjusted gross income. 

How You Can Prepare

If you received an audit letter from the IRS, gather all of your tax documents and related information required by your auditor. You do not have to provide more information than is requested. Make copies of everything and keep all original documents for your records.

Consider hiring a tax planning professional to assist you during the audit process. Such individuals specialize in tax compliance and will help you answer questions, so you don’t give the auditor unnecessary information and prolong the auditing process. Whether you hire professional help, provide brief, honest answers to all queries while maintaining a calm demeanor. You may also decide to hire an accountant or bookkeeper to help permanently to avoid tax compliance issues in the future. 

Manage your business’s finances with help from Wilson, Rea, Beckel & Associates, CPAs, LLC. Based in Pagosa Springs, CO and serving the Four Corners area, you’ll receive the tax compliance assistance your business needs to avoid audits. Call (970) 731-1040 today to schedule a consultation or visit the company online for a full list of tax services.