The past year has proven devastating for small multiple business owners. Trying to keep your doors open despite pandemic-related challenges probably stretched your finances – and your patience – to the limit.
Unfortunately, the IRS might reward your strategic efforts to stimulate the economy with an audit. If so, how can you make things go as smoothly as possible?
Things might not be as bad as they seem
With the revenue service’s plans to significantly increase small business tax audits this year, you better get ready. But, how…?
Regardless of whether you’ve had previous experience dealing with questions from the IRS, the potential of a looming audit can seem like a threat to your financial future. Instead of jumping to conclusions, though, understand what you could face.
You’re not necessarily in trouble
Audits are generally not detrimental to ethical business owners. You might need to pay interest or a tax penalty if an auditor finds a mistake with your reported income, expenses, deductions or losses. Or, you might have no problems whatsoever.
Situations that may require a second glance include:
Business versus a hobby. Many entrepreneurs have grand ideas about business prospects, yet seem to thrive on taking deductions instead of generating income. It’s normal to claim expenses as you get your business off the ground. Though, depending on your reported profits and losses over time, you might need to convince the IRS that your accounting aligns with tax laws.
Where is that receipt? Accurate recordkeeping is imperative for filing a tax return; you must support your claims. Electronic records should be adequate, as long as you respect your legal obligation to keep track of your financial documents for a minimum of three years from when you file.
Business or pleasure. Part of your home expenses can decrease your tax liability if you dedicate a portion of your residence solely to business purposes as your primary place of business. (Don’t even try writing off a percentage of your mortgage and electric bill for wrapping up client correspondence while binge-watching Netflix in your pajamas!)
You would be wise to approach an audit with appropriate representation. If you receive an audit notice, protect your interests by immediately contacting a tax attorney who specializes in IRS matters. Please contact the Law Offices of Robert T. Leonard for more information.