Running a successful business is all about preparation and forecasting. Whether you are running a restaurant, tech company, or construction company, staying one step ahead is critical to building a robust and growing operation. Regardless of the type of business you run, paying taxes is an inevitable part of the process and tax audits are generally something you want to avoid.
When it comes to tax preparation for small businesses, accuracy and efficiency are key elements of prosperity and growth. Otherwise, the IRS may come a-knocking. So, as a small business owner, how can you protect yourself and prevent that knock on the door?
Let’s take a closer look at the numbers.
What are the Chances My Small Business Gets Audited?
The chances of an IRS audit are actually pretty low. One percent of taxpayers are audited, but your chances are higher if you run a small business. After the year 2020 and the slowdown of the pandemic, the IRS has announced that they will be ramping up audits of small businesses. The IRS audited about 140 partnerships tax returns out of the 4 million or so filed in 2018. This comes out to less than .00004%. When it comes to S corporations, the numbers varied some, as 397 returns were audited or .01%. After a difficult year for all business owners, the IRS will be tightening up in 2021 and making up for lost ground. The good news is that although an audit sounds foreboding, it doesn’t have to be. There are effective strategies your business can implement to avoid raising red flags. At the same time, implementing these organizational strategies will actually benefit your business in the long run and ensure that you’re not operating on faulty numbers. Things that may increase your chances of being audited include:- Surpassing the $1 million dollar threshold. If your business is raking in more than $1 million then congratulations! This is great news, but it also means that the IRS might look at your taxes with a much more careful eye, so incorporating (if you haven’t done so) is a must by this point.
- Failure to report income or earnings.
- Suspicious numbers with your deductions