It’s tax season! And that means many small business owners will be rummaging through old receipts to build a clear picture of their company’s finances over the past year. Even if you’re hiring an accountant to do most of the work, it can turn out to be a bigger task for even the most responsible and organized person.
According to the latest IRS Data Book, the agency audited nearly 1.2 million tax returns, which is about 0.6 percent of all filings during 2015. While it’s only a tiny percentage, there’s no sure way to avoid an IRS audit. Here are 5 ways to decrease your chances of drawing the unwanted attention.
1. Claim your 1099 income.
All income is reportable. Most income will be reported on 1099 Forms. It’s a series of documents the IRS refers to as information returns that are various types of income other than wages, salaries and tips. The 1099s are important because it lets the IRS know how much you paid someone and vice versa.
The most common ones are 1099-MISC (for independent contractors), 1099-INT (for income in the form of interest on a loan), 1099-DIV (for dividends, distributions and capital gains), 1099-B (for stock transactions) and 1099-K (for credit cards sales – 200 transactions or $20K or more in sales). If you’d like to see whether you apply for other 1099 forms, here’s the entire collection on the IRS website.
2. Determine whether you’re eligible for the home office deduction.
Do you run a business from the comfort of your home? If you can provide photographic evidence that shows your home office has clear and identifiable boundaries that draw a distinction between your home and office, you may be able to claim it as an expense in Form 8829.
3. Do not round up on your calculations.
The IRS found 2.1 million math errors on tax returns in 2016 (that’s returns for tax year 2015). Math errors are usually found on paper returns. Adding, subtracting, multiplying or dividing something incorrectly on your return is a very common math error that the IRS frequently corrects.
"Other mistakes include entering different figures for the same item on your tax forms, applying the wrong tax-rate tables to your taxable income and inadvertently taking a deduction for more than the law allows," says Robin LaBrie-Jackson, director and chief financial officer of Mira & Associates. "If you’re using a tax program, it’ll calculate the totals number for you."
In many cases, business owners will estimate amounts because they do not have the documents in front of them while filing their returns. You may report a mortgage deduction of $10,000, but if the real amount was $9,895 – you have to report the exact number as shown on the 1098 Form. Those numbers are being reported to the IRS by other entities, so you can’t fudge it.
4. Accurately state your charitable deductions.
When making a charitable contribution, make sure that the organization is recognized by the IRS as tax-exempt. If claiming a charitable deduction, state who you donated to and the organization’s tax ID number.
If you made a donation but received something in return, like a dinner, the portion attributed to the dinner is not deductible but the amount over and above the dinner, is deductible. Use the IRS's "Exempt Organizations Select Check" tool to confirm the tax exempt status and always make sure to get a receipt – even for cash.
5. Higher income means higher likelihood of being audited.
For taxpayers with higher incomes, the chance of an audit is increased. When the IRS initiates an audit, it’s usually focuses on one tax year, but they may ask you to bring three years of tax documents. You aren’t required by law to provide all 3 tax years, so don’t open the door for more questioning.
Being selected for an audit doesn’t always suggest there’s a problem. The IRS has audited fewer people in 2016 than it has in more than a decade because of budget cuts and staff reductions, according to agency data. If you are selected, don’t freak out because the IRS is not the big, bad and ugly.
Calmly pull your receipts together and gather the correct information to substantiate what you originally reported. A lot of times, you’ll find that what you estimated and reported was very close to the actual amount.
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