IRS Will Increase Audits by 50% of Small Businesses

The IRS says it will increase audits for small businesses by 50 percent this year despite the fact that taxpayers have to survive a pandemic-stricken calendar year. In an event of the American Institute of Certified Public Accountants, the IRS deputy commissioner of examination for small businesses said that the IRS will be focusing its efforts to increase compliance activity in partnerships and investor returns related to pass-throughs. 

Fortunately, an audit is not the end of the world and there are strategies you can implement to diminish or even eliminate tax mistakes and dodge an audit this year.

Complete Records

Good record-keeping is key to a solid defense against an audit. This defense consists of 2 layers. First, good records prevent mistakes in reporting revenue and expenses. Second, your documents will prove and justify your income and deductions to the IRS. A current and organized set of books will save you a lot of trouble during the tax season. Your books need to be up-to-date and the best way to do that is to have a dedicated accountant handle them. Don’t wait until the next month to record your sales or expenses, delayed accounting is tantamount to signing up for an audit voluntarily. 

Properly categorize expenses and use the correct deduction

While it looks like common sense to try and use all expenses to reduce liability, it’s important to note that they are not all applicable and being too selfish will land you in an audit. Be sure to use the correct deductibles. Not all will be proper. The IRS will look for unusual itemized deductions even if it is a legitimate transaction. If it is an unusual expense it could be subject to further investigation. That’s why you should be ready to explain any unusual expense you made that year. Don’t wait for April to start gathering your receipts and papers, document them as close to real-time as possible.

Timely payment of estimated tax

When you usually pay $1,000 or more in taxes, you will need to make estimated quarterly tax payments which are based on your prior year returns. If you miss out on these quarterly payments, you could raise suspicion from the IRS. Don’t risk it, make sure you set aside cash for this.

Manage your contractors

If you have a high ratio of independent contractors to full-time employees, it could catch the eyes of the IRS. You should be aware that independent contractors and full-time employees have different tax consequences. The IRS could lead to the conclusion that you are avoiding your payroll tax liabilities. 

The main difference is in the type of control the business has in the employment relationship. As a rule, the employer has control over the means and result of the full-time employee’s employment, but only has control over the result of the contractor’s employment.

Hire a tax expert who can navigate the COVID tax changes

Not only has the pandemic affected last year’s tax season, but its effects will most likely be felt until the next years. In the myriad of COVID-related legislation passed last year and more to come this year, you need someone who can maneuver you out of that jungle. 

These rules overlap each other and the best way to protect yourself from mistakes in dealing with their interlocking consequences is to hire a trusted tax expert. 

It’s already mid-year and if you have reservations about the bookkeeping you have been doing so far, don’t hesitate to reach out to us.