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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Small business and IRS audits – What they are looking for and how to prevent problems

    IRS Audit and Your Small Business

    Face it…The Government is at odds with small businesses in America. ¬†Money “belongs” to the government first right?…and small businesses move around alot of it. This makes the government uncomfortable, just like you would be if you asked your small child to watch your stash of bills.

    Thus, the sour relationship.

    The IRS doesn’t really care whether our tax policy is right or wrong, it just “enforces” the policy. It has indicated that most “cheating” is done by small business and as a result it watches small business owners more closely than wage earners.

    This is partially evidenced by the number of IRS employees (more than 45,000) dedicated solely to squeezing the small businessperson where it hurts the most

    As a result, small businesses are at great risk for an audit. We know though what the IRS is typically looking for when they conduct a small business audit, and the most common items are:

    • Personal living expenses written off as business expenses
    • Auto expenses written off for travel that was not business related
    • Large business entertainment expense
    • Failure to report all business related income
    • Whether workers are being classified as independent contractors when they should be classified as employees
    • Whether the business is making all of it’s payroll tax deposits.

    I always make four suggestions to small business owners as a result:

    1. Use a reputable payroll company – this helps prevent the use of payroll withholding to keep the business afloat during down times. The most dangerous problem is when the small business owes a lot of payroll tax. It won’t go away. It will stay with the business until it dies and a large portion of it will stay with the responsible owner etc. until it’s paid.

    2. Use someone else to do the tax return – i.e. don’t do it yourself – a third party cpa or tax lawyer can look at the big picture and make sure the return makes sense, spot missed deductions, and apply tax law to the facts of your situation. This reduces the chances that income is missed and increases the odds that all legal deductions are taken. It is worth the dough in the end.

    3. Plan ahead – talk to a cpa or tax attorney about what you can do in coming year(s) to take advantage of the tax code. Talk to them especially when you plan on taking on employees and paying them as independent contractors, or leasing a private jet.

    4. Treat the business as a separate entity – set the business up properly, keep a separate set of books, use separate checking accounts, don’t use business accounts to pay for movie tickets and trips to the zoo.