The dreaded small business audit. Many business owners fear an audit by the IRS more than any other obstacle they might face. This fear—or at least, this level of fear—is largely unfounded.
At its core, an audit is simply a “second look” by the IRS on a business’ tax return. The auditor compares the return to the business’ books, ensuring there are no discrepancies or other errors. Most audits are completely random, as the IRS selects a certain number of returns each year as a compliance check.
This is similar to a quality control measure in your business: Just as you can’t check every product your business manufactures or screen every interaction your team has with a client, the IRS can’t thoroughly examine every tax return submitted. However, you would be remiss if you didn’t review a sample of your product or your customer service interactions. So it is with the IRS and small business audits.
You might have noticed I said “most” audits are completely random. There are some things you can do that increase the chances the IRS will pull your return aside for a closer look. Following are some missteps you can easily avoid.
The list above is by no means an all-inclusive, but you might have noticed an overarching theme: honesty. While honesty does not guarantee you will never undergo a small business audit, being truthful on your tax returns will set your mind at ease.
Since most small business audits are random, nothing you do guarantees you will never undergo one. Following are some small business audit “survival tips”:
A small business audit is never “fun,” but there is no need to fear the possibility of one. As long as you are honest about your income and deductions, keep good records, and ensure you are comfortable with your tax return before submitting it, you can put your mind at ease about the possibility of an audit and focus on the more important aspects of running your business.