A Tax Audit: How to Prevent 7 ways of it.

A Tax Audit, According to the nightmare, when you are focused on your work, a man with a stone face and a heavy briefcase stands in the doorway. He is an IRS agent who has come to inspect you. Also asks to see all of your receipts going back five years. He wants to check out your home office. He requires everything now.

You start to tremble. Not all purchases are accompanied by a receipt. Your unemployed child has been living at the “home office” for the past few months. You might not have disclosed every source of income. This man would want nothing more than to jail you for tax evasion, based on the way he is dressed.

A Tax Audit, Thankfully, the nightmare was more of a fantasy. A very small percentage of small firms get audited. And when they do, the IRS typically contacts them via mail rather than a visit to request additional proof to resolve a problem.

But, no owner of a small firm wants an audit. Here are some advice for small businesses on how to prevent tax audits and handle them if they do occur.

1. A Tax Audit, Verify your tally

Someone who provides you a tax form, like a 1099, that discloses income likewise reports that information to the IRS. The IRS will anticipate that the figures in your tax return will line up with the data they’ve obtained from outside sources. The IRS will notify you if there is a disparity and may also audit your return.

If the math is wrong, your tax return can also draw unwanted attention. Check your math as well as any information you include on your return twice because mistakes are simple to make. Think about using tax preparation software that will handle the math for you or hiring an accountant to prepare your return.

2. Avoid reporting a loss each year.

A Tax Audit, You are probably going to be the subject of a tax audit if you report a net loss in more than two out of every five years. Also, there’s a danger that the IRS will classify your company as a hobby and prevent you from deducting any of your business expenses.

Read More: Loss of Future Earnings, How to calculate for compensation.

3. A Tax Audit, Maintain accurate records and report all income and expenses.

Your likelihood of being audited will be decreased if you save your business spending receipts and keep track of all of your business income and expenses in a business bank account. Not only will this make preparing your tax return simpler, but you’ll also be ready in case there is an audit.

On the other side, when you attempt to conceal income or misrepresent your expenses, you raise your audit risk. Also, while rounding to the closest dollar is OK, doing so to the nearest tens or hundreds may give the IRS the appearance that you are simply inventing numbers.

4. Avoid paying excessive salaries to employees who own stock.

A Tax Audit, Paying your leaders a high wage can help your C firm reduce corporate profits and, as a result, lower taxes. So, exceptionally large salaries could draw attention to your tax return. Determine the fair salary range for your industry and don’t go beyond it.

5. A Tax Audit, Watch Out for Self-Employed Workers

Because hiring independent contractors might be a strategy to avoid paying payroll taxes, businesses that have a high ratio of independent contractors to employees are more likely to be audited. Who can be an independent contractor and who needs to be classed as an employee is spelled out in detail by the IRS. Make sure you are aware of the regulations and adhere to them. If you are unsure, consult a tax attorney or accountant for small company help.

6. Only deduct an office at home if you can do so legally.

A Tax Audit, Home offices have a terrible notoriety for being a warning sign for tax audits. But today you may take a home office deduction with confidence if your place is actually eligible. For the majority of individuals, this means that the home office needs to be a dedicated space. That is only used for work; a desk in the living room corner is ineffective. But, if you have significant maintenance or utility costs, or if you claim a home office while also renting office space. Elsewhere, a home office could still pose an audit risk.

7. A Tax Audit, Pay your small business taxes as estimated.

Making quarterly anticipated tax payments is a good idea if you anticipate owing your business entity at least $500 in taxes at the end of the year. Failure to make these payments may subject you to fines and increase your vulnerability to an audit.

You shouldn’t be concerned about a tax audit if you maintain accurate records and are truthful on your tax return.