Some business owners may find themselves undergoing audits from the IRS with more frequency than they’d prefer. Not only are these audits an invasive and stressful process, but they also take valuable time away from the work day. Having to set aside time to meet with IRS employees, prepare the necessary materials ahead of the audit, and keep up-to-date on the status of the IRS’ efforts can mean significant time lost for a company.
Audits can be intimidating, especially if you find yourself subject to more of them than average. Only one to two percent of businesses actually get audited, but certain problems can be a cause for the tax man to come calling time and time again.
Below, we’ve outlined three primary reasons that some small businesses find themselves being selected for audits time and time again.
The Three Reasons Your Business Keeps Getting Audited (and What to Do About it)
Lack of reporting
This is likely the most self-explanatory reason why the IRS would continually audit a business. If you fail to report or turn in reports that are severely lacking in detail, you’re sure to run into trouble. It’s critical that you commit to keeping excellent records of any money that passes through your hands. This process will look different for each company; take the time to sort out the best way for you to track information.
If you misreport or under-report income, in specific, it raises a huge red flag that the IRS can’t afford to ignore. It’s critical that any income from W-2s and 1099s matches the income you report on your return to a T.
It’s easy to try to hide income or fudge numbers– but when you do, you’re breaking the law and putting your company at risk of an audit. Avoid mismatched numbers and don’t give the IRS a reason to come knocking on your door. Modern technology has made it easy for the IRS to pinpoint instances where income is underreported; be thorough and honest and always get your reports in on time.
You’re using round numbers
It’s understandable that accurate bookkeeping isn’t often at the top of business owners’ to-do lists, but getting lazy with numbers could be triggering the multiple audits you’re facing. If you don’t have somebody on-staff who’s position is dedicated to keeping careful track of business finances, you’ll likely find yourself tempted to start estimating and rounding figures come tax time.
Round numbers are a tell-tale sign of estimates. The IRS is well aware of this fact– and they don’t like estimates. A business owner who gets too comfortable with estimating can easily wind up missing thousands of dollars’ worth of income or expenses. Beyond that, plenty of seedy individuals know that estimating is a great way to try to intentionally withhold information and skirt the law.
Outsource or delegate bookkeeping responsibilities to a skilled, trustworthy accountant or staff member. Opting to handle the financial side of a business on your own is often a recipe for disaster– numbers are best left to the professionals. With somebody keeping closer track of your expenses and income, you’ll be far less likely to be flagged for an audit.
Your return is riddled with discrepancies
Discrepancies can arise in any number of ways throughout the course of your return. In many cases, these discrepancies come down to simple human error. A simple “oops” won’t cut it once the IRS decides they need to investigate– you should work hard to pinpoint and clear up discrepancies before you’ve got an auditor knocking on your door. Don’t forget a final zero on a number and don’t rely on shaky math skills– triple-check your work.
This is another reason why having a specialized professional carry out your bookkeeping is such a good idea. An accountant or other professional is still at risk of making human errors just like everybody else, but the risk of making huge mistakes or overlooking certain things entirely is significantly reduced.
Other, clearer discrepancies can also cause problems and may appear more nefarious. Overstated deductions, incorrect filing statuses, mix-ups with dependents, and a number of other issues are all fair cause for audit in the eyes of the IRS. Make sure you understand the appropriate tax laws and have a clear understanding of how you should be filling out your return; seek the assistance of a tax professional if you’re unsure of what to do.
Be proactive to Avoid an Audit
The process of filing taxes can be complicated at the best of times; it’s understandable that mistakes are made, but it doesn’t mean that the IRS will hesitate to send an auditor out to clear things up. It’s best to work proactively– rather than reactively– to avoid audits and keep business running smoothly. Telltale signs like a lack of information, mismatched facts, and lazy math are all easy triggers for audits.
Fortunately, repeat audits are easily-avoidable if you’re willing to put in the work it takes to clean up your bookkeeping practices. Outsource your financial work to an external accountant or consider hiring on a specialized staff member who’s dedicated to making sure numbers line up. It’s easy to cringe at the added expense, but one only needs to factor in the time and money wasted during the process of an audit to see that the cost is short-term.
If you’re looking for assistance in dealing with repeat IRS audits, give the team at TaxLane a call today. We’re committed to providing our clients with fair representation before the IRS and offer excellent strategies that businesses can leverage to increase their chances of success come tax time.
