Date: February 10, 2024
Tips to Avoid Triggering a Tax Audit
With about $80 billion more in funding last year, the IRS is ramped up, and has hired more agents. Let’s talk about audits – no doubt, as a business owner, you have thought about it. You’ve probably wondered ‘What triggers an audit?’and ‘ How can I avoid those triggers?’. Although some audits are completely random, read below for some good general practices to keep in place to and avoid receiving a ‘love letter’ from the IRS stating that you’ve been selected for an audit.
1. Income Reporting –
If you don’t report income from all sources, whether that reporting is intentional or a mistake, this will trigger an audit. Keep in mind that the IRS already receives copies of 1099 forms, so they will spot any discrepancies between what has been reported and what hasn’t. If you have a side hustle, you will want to be sure you report all that income – the IRS will most likely catch you if you don’t! It’s important to note that the updated third-party payment app reporting is delayed for the 2022 tax year, but expect it to be in force for 2023 (this is referring to the reporting change of popular apps like Venmo, PayPal, etc., issuing 1099-K forms for $600 and more, regardless of how many transactions).
2. Deductions and Expenses –
We believe that every taxpayer should take advantage of the tax savings that exist, and that no one should ever pay more than their fair share. As you probably know, the tax code is long and convoluted, and there are many gray areas. Many business owners know you can claim certain business deductions, as long as they are “justifiable’. Here’s the fun part – the actual IRS definitions of ‘justifiable’ deductions are about as clear as a puddle of mud. This results in some business owners pushing the envelope as far as they think it should go. However, if the deductions and expenses are larger amounts, this dings on the IRS radar and could result in an audit. Having a tax strategist on your side to help give you expert guidance will lower your chances of triggering an audit or at least being prepared in case you get one. They will also ensure you are not overpaying and help to reduce (or even eliminate) your tax bill – legally!
3. Lots of Cash Transactions –
Some businesses, like restaurants for example, run largely on cash transactions. Unfortunately, this alone increases your risk of an audit (as the IRS is concerned that the income is being under-reported.) Good news though – so long as you make sure to keep good records and always disclose ALL of your income you will greatly reduce your audit risk. As a good rule of thumb, you always want to keep thorough, accurate records, this ensures that nothing falls through the cracks and protects you and your business in the event of an unfortunate audit.
If you do get that unwanted ‘love letter’ from the IRS announcing that you’re being audited – don’t worry!
Contact a tax strategist or attorney, sooner rather than later, because the IRS demands timely responses. Remember that documentation is key, and in most cases, resolving an audit requires submitting the requested documents. If you do end up disagreeing with the IRS you have 30 days to appeal their findings, and then you’ll move up the ladder – if your appeal is unsuccessful, you will end up in Tax Court. No one wants to get to that point, so remember – avoid any triggers you can by having a professional on your side, reporting any and all income, and keeping extensive, accurate records. We love helping our clients take advantage of the tax savings provisions that are out there but buried under pages of tax code. If you are looking for a tax strategist, we are happy to help.
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