Best Practices for Avoiding an IRS Audit

Every small business owner, entrepreneur or independent contractor fears the notice of a pending IRS audit. Even for those with stellar accounting practices who operate a tightly run ship, IRS audits still mean time, energy, and money spent complying with document requests and investigations into seemingly minuscule expenses. So what can be done? While no business can ever be perfectly audit-proof, there are certain steps you can take to minimize the possibility of an IRS Audit.

Organize and Double-Check

The first step to avoiding an audit is making sure your numbers are right in the first place. In a growing business, accounting for various types of expenses and different income streams can quickly become confusing and even overwhelming. It can be easy to make small errors in your calculations that, while insignificant to you, can still trigger an audit. There are some key steps you can take to minimize the risk of error when preparing your financial documents:

  • Keep adequate documentation of all expenses, particularly major ones, so they can be properly accounted for on your return. Avoid having to engage in any “guesswork” about how certain expenses should be categorized, or what they entailed.
  • Automate your record-keeping as much as possible. Human error is a reality of life, and will inevitably occur in your business. Minimize the chances of such error by using formulas in your spreadsheets and bookkeeping.
  • Avoid the temptation to “round” up expenses or income, or stick to clean numbers. Line items in your books will rarely be even figures, nor will they add up evenly. While rounding up can seem like a practical time saver, it is also a red flag for the IRS when your numbers seem too clean.

Watch Out for the Temptation of Travel and Entertainment

At the end of the day, many IRS audits are triggered by the simple observation that a business’s claimed expenses appear to be too large in relation to the business’s income. One category of expenses that can quickly add up, and garner the IRS’s attention, is travel and entertainment.

If your employees frequently travel for work and are reimbursed by the company these can be very legitimate expenses to reimburse. However, it is important to take extra precautions to make sure that only the expenses of your employee, rather than that of their spouse or family members, are being reimbursed, and that all of the expenses and costs being considered truly occurred in the pursuit of ordinary business, rather than on personal side trips taken during the day, or personal time spent before or after a work trip. These are the types of expenses that can land you in deep water with the IRS.

Evaluate Your Tax Audit Approach With the Tax Attorneys at Romano & Sumner, LLC

Even if you think you are on the right approach to minimizing your chance of an IRS audit, it never hurts to consult with qualified professionals who can review your tactics, company policies, and Texas-specific tax concerns. At Romano & Sumner, LLC, our years of tax experience can put you on the path to success and minimize your worries about the possibility of an audit. To find out more, contact us online or at 281-242-0995.

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    Romano & Sumner, PLLC

    Romano & Sumner, PLLC