According to the Associated Press, the Internal Revenue Service increased audits by nearly 11 percent from 2010 to 2011. Ouch!
An IRS audit reverses the constitutional presumption of innocent until proven guilty because you are presumed by many an IRS auditor to be guilty of underpaying your taxes. Makes you want to do anything to “audit proof” your business . . . right? Of course.
The problem is that you can’t audit proof your business and anyone who claims that you can is either misinformed, naïve, or a shameless charlatan. While you can’t actually “audit proof” your business, you can minimize the risk of an IRS audit by understanding how the IRS targets business owners. The IRS is most interested in:
- Cash businesses
- The percentage of credit card sales (obtained from the new 1099-K reporting requirements) to total sales which may indicate the underreporting of cash sales
- Auction and online businesses
- Self-employment deductions
- Executive/shareholder compensation and fringe benefits
- Related party rentals
- Worker classification between employees and independent contractors and Form 1099 compliance
- Hobby losses
- Construction industry
- Passive activity losses (e.g., losses from rentals & partnership investments)
Key IRS audit initiatives include reconciling income (comparing the business’s revenues to bank deposits), reviewing related party returns, employment tax exams by the IRS and the Dept. of Labor, and having IRS personnel trained to review transactions recorded in QuickBooks, Sage, etc. and other software programs to identify “correcting” transactions.
Because each business and how it operates is different, each company’s unique factors need to be analyzed when evaluating its potential exposure to an audit.
We invite you to call 610-594-2601 today to make an appointment to discuss your audit exposure. You can also schedule a free consultation at our website.
The author wishes to thank Businesswriters.biz for its contributions to this article.
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