Employment/Business Tax Audits
Many business owners might not suspect it, when the IRS conducts business audits, it doesn't just examine your business, it puts the owner under the microscope as well. Unsuspecting business owners can get caught in uncomfortable situations during audits where they end up having to justify their personal as well as their business expenses.
What To Expect From An IRS Business Audit?
Here are some of the most common things that IRS agents are trained to look for during business and personal audits:
- Did You Claim Personal Entertainment, Meals, Or Vacation Costs As Business Expenses: Travel and entertainment business expenses are another area where the IRS knows it can strike gold. Document all travel and entertainment deductions. Taking buddies to the ball game and calling it business won't fly if you can't explain the business relationship in a credible fashion. Just saying you took someone out to dinner for business will not suffice. The IRS will want some sort of documentation corroborating that the excursion was indeed business-related.
- Did You Write Off Auto Expenses For Your Car: Personal use of your business-deducted automobile is very common, so IRS auditors expect to find it during a business audit. That doesn't mean they will accept it, however. Auditors don't believe you use your one-and-only auto 100% for business and never to run to the grocery store or the dentist. If you operate your car for both business and pleasure and claim a high percentage of business usage, keep good records (preferably a mileage log).
- Do You Have A Lot of Miscellaneous Expenses: When you are filing your taxes each year, it's best to avoid listing expenses as miscellaneous if possible. A significant amount of miscellaneous expenses is a red flag for the IRS because it indicates that either you keep poor records, you are sloppy, or you are hiding something by classifying it as miscellaneous.
- Does Your Business Handle A Lot of Cash: If your business is largely cash done in cash, IRS agents are taught to assume that you are skimming or diverting money into your own pocket without reporting it as income. Here again, the better your records and receipts are, the better off you'll be.
- Did You Fail To Report Some Business Income: if an IRS agent gets the impression that you simply "forgot" to report certain items as income, usually $10,000 or more, then you might be in very serious trouble. Purposefully not reporting income is criminal, and the IRS regularly makes referrals to their criminal investigation division, during audits. If this happens, you need to hire an Experienced Tax Attorney IMMEDIATELY, remove yourself from the process and let the Tax Attorney handle the remainder of the tax audit.
- Payroll Tax Audits: Do Your Payroll Taxes Match Your Reported Employees: If you are using employees rather than independent contractors, make sure that their payroll taxes are complete and accurate as the IRS will be double checking your payroll taxes to ensure that they match your claimed employees.
- "Independent Contractors" vs. Employees: The IRS routinely conducts audits of businesses that hire independent contractors, because of the tax savings associated with hiring contractors instead of employees. Expect extensive questioning about the role of these employees: who they answer to, who directs them, how much freedom they have, etc. If the IRS decides that your independent contractors are really employees, you will get hit with some serious back taxes and penalties.
Hire an Experience Tax Attorney To Defend Your Business During an Audit!
Don't worry that hiring a professional may give some indication of guilt; the IRS is used to it, and in many instances might prefer dealing with a professional familiar with the process.
If you're feeling anxious about any of the above-mentioned items which the IRS is trained to look for during Business Tax Audits, consider hiring an Experienced Tax Attorney:
- Who routinely handles these types of audits,
- Who can successfully represent your business during an IRS tax audit and
- Who can defend your business from further Governmental Action!
YOU SHOULD NEVER HAVE TO MEET WITH THE IRS!
If you have been contacted by the IRS or a State/Local Taxing Authority, regarding a possible Business Tax Audit, contact Marini & Associates, PA immediately for assistance in representing and defending you from further Governmental Action and Assessments!