5 Tips to Beat a Small Business Tax Audit

Nobody likes the idea of being audited, whether the IRS wants to take a closer look at their personal filings or those related to their business. But when it comes to filing our taxes, personal or professional, the complex process involved almost begs for mistakes, especially if you decide to go it alone and use an online service like Turbo Tax to compile and send in your annual income or estimated quarterly tax documents. And yet, if you’ve got all your ducks in a row, an audit by the IRS doesn’t necessarily have to be the end of the world. In fact, it could be over before you know it if you have the right system in place where your tax filings are concerned. So for the entrepreneurs out there managing their own businesses, here are just a few tips to help you beat a small business tax audit.

  1. Be forthcoming. If your business is on the up and up and you’ve been careful to report income and expenditures by the book, then you have no reason to fear an audit. Although these inquiries are conducted to some degree based on formulas, you may be selected for audit through no fault of your own. For example, if a business you work with is audited, your business (and others they work with) could also be audited. So answer any questions honestly, provide required paperwork as needed, and your audit should be a breeze.
  2. Get organized. The best way to approach any tax audit is with a sure knowledge of where you stand, and this can most easily be achieved through organization. Of course, it helps if you’ve got everything in order to begin with, and that means keeping all of your tax filings and related documents neatly stored for reference, saving receipts for all business-related write-offs, and so on. When you start with efficient bookkeeping you’ll find that an audit is a much less intimidating affair.
  3. Use a service. You might think that you can file your business taxes on your own, just like your personal taxes, but this is a mistake. For one thing, business filings tend to be far more complex than their personal counterparts. But the other upside of using a tax filing service is that you may be protected in the event of an audit. H&R Block, for example, will help you to get through your audit if they filed your taxes for you, and they also have a policy by which they guarantee their service. So if you end up owing money as a result of a mistake made by one of their tax prep specialists, they’ll foot the bill.
  4. Call a lawyer. Whether you feel fairly confident about your chances of getting through an audit or not, it’s in your best interest to let a tax lawyer handle the situation for you. The reason is that they know exactly what IRS agents are going to ask for and they can expedite the process. Whereas you might slip up and reveal an error that the IRS agent wasn’t even aware of, your lawyer will never make such a gaffe.
  5. Testify. One of the main reasons that businesses get audited is for messing up their deductions. So whether you claim tax back when leaving the UK or another country of residence, you deduct mileage without saving receipts, or you take your clients to the same restaurant every week, you should know that a lack of “evidence” doesn’t necessarily have to tank you in an audit. This is because the IRS accepts all kinds of proof when it comes to business expenditures. You can use the history on your GPS, for example, to prove mileage in lieu of receipts. Or your favorite waiter can give testimony to verify your weekly presence for lunch meetings. You might panic if you don’t have receipts, but with plenty of forms of proof accepted you should be able to skate through an audit.