18 Jan Lookout for These 4 Mistake to Avoid the Eyes of the IRS
Every business owner dreads the audit. Sadly, being randomly selected for an audit isn’t like being randomly selected for jury. If it comes at an inconvenient time, you can’t just say something inflammatory and hope they won’t pick you.
But aside from being randomly selected, there ARE things you can do to avoid being flagged or unnecessarily drawing the eyes of the IRS.
Here is a list of 4 things to lookout for:
- Deductions and Expenses
While obviously you want to figure out how to take advantage of as many deductions as you can as a business, if your expenses consistently and with a large margin exceed your profits, this can be a red flag for the IRS. Every business incurs start up costs, can take a while to get off the ground or can go through rough times but in the long run, they are expected to make money.
Some things to consider:
- Make sure you are only claiming things that are ACTUALLY business expenses.
- If you are a solopreneur or one man show, make sure your personal and business finances stay as distinct as possible.
- Don’t use deductions as a way to make a personal hobby more affordable. Again, start up costs and slow beginning years are to be expected, but if it doesn’t really ever take off as a viable business, the IRS will take notice.
- Donate a lot to charity? Keep records! Consistent and high charitable contribution can be an attention getter for sure.
- Don’t Hire Creeps
I don’t think I could preach this loud enough. Making ethically questionable choices when it comes to your financial records and business is NEVER WORTH IT!!! Even the little fudges and small items being tucked in the corner. The benefit never outweighs the cost both to your business’ finances and reputation.
When you are choosing an accountant to prepare your taxes, don’t just hire the cheapest guy out there or the one who seems to have a solution for every concern you might have and tells you, “Don’t worry about it,” a lot. Taxes may be over your head, that is expected and fine! But work with someone who keeps your informed and helps you understand the processes. Work with someone who has a good reputation. Be picky here. Should you ever be audited, this will go a long, long way!
- Add it Up!
This may sound obvious but errors in your addition and subtraction make the IRS wonder what other mistakes may be floating underneath the surface. Nowadays, most people do their tax and accountant work through software but that information all has to come from somewhere. Make sure the records you keep match the software reports. Make sure that the numbers in your accounting and bookkeeping software, line up with the numbers that your tax software are reporting. Whether you are using a service or doing it on your own, take the time to review your numbers.
- Cold Hard Cash
This can be an easy area to lose track of and not keep exact records. Don’t wait until the end of the year and use guesswork with your cash. Credit cards processors are required to report your total transactions and the IRS actually has a formula based on these reports of how much cash they expect you to report. Keep good records throughout the year of your sales and tie your deposits back to these records.
At the backbone of each of these is the records that you keep. Are you taking the time to reconcile your books monthly, catching mistakes while there is still time to address and correct them? Do you have an easy system to keep records of your receipts and expenses that integrates with your busy lifestyle? Do all your numbers add up and tie out? Do you have a solid understanding of where you stand financially throughout the year (because of those great records!) so that you are making wise business decisions and not making choices that might cost you profits and flag unwanted attention come tax-time?
I understand the burden and sacrifice of time that can go into keeping up with your financials throughout the year. Most entrepreneurs and small business owners often don’t feel that they have the time to pay attention to these details until crunch time. I would argue that the greater risk lies in avoiding these tasks.
This is where I get really excited about the opportunity for you to outsource your books and taxes. At Two Roads, the burden of the daily data entry and information sorting is taken off of your plate. An easy and integratable solution is tailor fit to your business needs. BUT you are provided with a financial overview of your books on a monthly basis. YOU are equipped to steer the direction of your business without getting lost in the weeds. You can breathe easy knowing that we are working to make sure to keep you compliant throughout the year so if that audit does ever roll around, you can easily access organized information with clear records backing them up. Should you also choose to use our tax division, the two departments can fluidly work together and save you the stress of relaying information back and forth.
Whether or not you choose to work with us or another bookkeeping firm to outsource your books, the bottom line still remains. The best way to save your business time, money and panic when it comes to being audit-prepared is through accurate and orderly financial records!