After years of low audit rates, the IRS announced it would increase small business audits by 50 percent. This news comes at a time when complex tax law changes and stimulus programs in response to COVID-19 have made corporate books even more complicated than usual.
The Illinois CPA Society (ICPAS) warns that this could lead to audits and enforcement actions against companies ranging from long-standing family businesses to the many online businesses that were created in the wake of the pandemic.
With the IRS planning to hire more specialized auditors by February 2021 to step up their enforcement efforts, ICPAS offers the following tips to help safeguard your business interests and avoid an audit:
- Keep Clear Records: Accurate and honest reporting of all income, deductions, credits, expenses, and other numbers can help keep an audit in check. If you make sure that you have sufficient documentation to support the numbers shown on your company’s disclosure statement, your individual tax return is less likely to be inaccurate or under scrutiny.
- Watch Your Deductions: Unusual individual deductions are a red flag for auditors, especially now that most taxpayers only claim the standard deduction. If your small business causes you to ask for clear deductions or report business losses, seek advice from a Public Accountant (CPA), as reporting losses for three years or more can increase your risk of being verified whether you really are in business.
- Make Your Estimated Tax Payments: If you expect to owe more than $ 500 in taxes for your business over the course of the year, you should make estimated quarterly tax payments. Failure to make these payments could result in auditing and / or penalties.
- Digitization: Today’s accounting software uses tools to keep your records accurate and secure. This will help your CPA prepare and file your tax returns electronically – the best way to avoid filing incorrect returns that could trigger an audit.
- Read Up On The Rules: Since many small businesses are founded as partnerships, it is important to determine if your business is subject to the Central Partnership Examination regime introduced by the Bipartisan Budget Act of 2015 which dramatically increases the IRS partnership examination procedures has changed.
Given the complexity of recent tax law changes and the audit process, consulting an expert may be the best business decision this year. A CPA is strategically positioned to help small business owners prepare for what lies ahead. The Illinois CPA Society’s free Find a CPA directory can help you find the trusted strategic advisor that is right for you based on location, type of services required, industries served, and languages spoken. Find your CPA at www.icpas.org/findacpa.