You & Your Money

10 Steps to Avoiding a Small Business Audit

April 04, 2023 Leisl L. Cording, CFP® CDFA® Season 2 Episode 13
You & Your Money
10 Steps to Avoiding a Small Business Audit
Show Notes Transcript

Unfortunately, a tax audit can happen to anyone, but there are ways to reduce the risk. Here are 10 steps presented to you by Leisl L. Cording, CFP®, CDFA®.  

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Welcome to “You and Your Money”. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Leisl Cording, senior vice president and financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. Let's dig in to today's topic. Today's topic how business owners can avoid being audited by the IRS. Start with the basics. What exactly is an audit? Well, Gary, an audit is a second review by the IRS of one's tax filings and whether that's your personal or a business filing. But the first review is done by a computer. And if there's any inconsistencies, that will draw up a red flag. And so the IRS may decide to audit that filing. And they have the power not only to recover missing taxes, but also to impose pretty severe interest and penalties. So you want to try to avoid that. And a tax audit can really happen to anyone, but there's things that you can do to reduce that risk and we'll talk about that today. But if you're audited, what you do next is really completely in your control. And so we'll talk about that as well. Okay. So let's start with avoiding the audit in the first place. What are the red flags that increase the likelihood of being audited? Well, there are several red flags to be aware of. A lot of it comes down to excessive claims or taking large deductions. So you don't want to take too many deductions in relation to your business type or size. So that's really important. And then if there's calculations that don't necessarily add up, if you haven't filed all of the 1099 that were issued to you. Failing to file, you never want to do that, or consistently filing late. So, for example, if you're filing payroll taxes late or you fail to report your own personal income, that's going to be a big red flag. Okay. So what about things other than deductions? Any other red flags? Sure. So there are other red flags that are perfectly reasonable, but that do tend to make the IRS want to take a closer look. If you're dealing mostly in cash transactions or reporting a net loss in multiple years or claiming an operating loss carryback or carryforwards. So those are some additional red flags. Okay, that's pretty helpful right there. Should business owners consider anything else as it relates to taxes? Well, another thing that we consider with our business owners is making sure that you're set up in a formal business structure and why this is important is because while anyone can really file or start a business as a sole proprietor, and that's a lot of the tax filings for small businesses, but it can bring up another red flag because people do tend to, they're not honest and they call themselves a one person business when they're really maybe not. And so you want to make sure that you're filing like an LLC. If you want to talk to an attorney, make sure you have the right business entity in place. That's important because, you know, it shows that you're really serious about having the business and not just using it as a quick tax shelter. Okay. So business structure, that's important. Then of course, there's a matter of how much money you actually made. I would assume trying to cut corners there is a sure way to get audited. That's right, Gary. And leaving out bits and pieces of income is a pretty big temptation. A lot of people... Not a good idea. But I have to say the payoff is really not worth the risk. For example, if you're self-employed and maybe a client pays you, but they didn't send you a 1099 to report it to the I.R.S. you might be inclined not to report that, but the IRS might still be able to find out about that through cross-checking. And also, if you're a business corporation, don't overpay yourself as an officer. That's really important as well. Okay. So good advice. All right. So let's say you do get audited. Now what? Well, Gary, we were talking about this before we jumped on here. And first of all, if you work with a tax professional, that's going to be your first call. If you don't work with one, you may want to consider hiring one. And it's just really important to be sure that you're honest during that audit. And as you prepare for the audit, it's really great to have all of your documents in a row and you should do that regardless throughout the year. So you just want to be sure that it's also clear that what you're bringing in for income and what your expenses are. And there's things like QuickBooks that can help businesses help keep track of that, and that'll make it easier if you if you ever do get audited. Document, documents, document. That's exactly right. Documentation is is very important. All right. So, again, like so many other things, honesty, transparency, that's the name of the game here. That's exactly right. You just have to be honest. Lying on your tax forms to the IRS or to an IRS auditor is a federal felony. So that's really important. Something you want to stay away from, obviously. And if you don't know the answer, tell them. Let them know that you'll get back to them. And sometimes people, they tend to lie if they're under pressure. So you want to just be sure that you're being honest during those audits. Great advice today. Thank you, Leisl. If you're interested in working with Weiss, Hale and Zahansky Strategic Wealth Advisors to create a tailored financial plan through their strategic Plan Well, IInvest Well, Live Well process, go ahead and give them a call at 860-928-2341 or request a complimentary consultation at their website whzwealth.com. That brings us to the end of this episode, as always. Thanks for listening to “You and Your Money” and find even more episodes, videos and other resources at our website. whzwealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network, member FINRA, SIPC, a registered investment advisor. Fixed insurance products and services offered through CSC Insurance Agency. They practice at 697 Pomfret Street, Pomfret, Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.