Those running small businesses, just like anyone else filing an income tax return, have an interest in minimizing the taxes that they pay to maximize how much the company actually earns. Small business owners may be eligible for numerous deductions and write-offs depending on the business entity they’ve selected and the industry in which they operate.
Smart accounting practices can help a company reduce how much it has to pay in income taxes each year, but the effort to minimize taxes and maximize revenue can sometimes result in a business owner facing legal and financial challenges. For example, if the Internal Revenue Service (IRS) begins to suspect that someone has not paid what they should in taxes, the business may have to undergo an audit. Audits can be very stressful and may lead to financial penalties or even criminal prosecution. How can a small business owner prepare for a tax audit?
Gather financial records
Proper financial documentation is the cornerstone of proactive audit response. Company records can help establish how many sales the company completed and what supplies it purchased. Records can also help affirm claims that certain expenses were deductible as business costs. Thorough and accurate financial records going back years will typically be a necessary element of any business audit.
Seek professional support
There are specialized accountants and also lawyers who can assist during the audit process. Professional review of the financial records and tax returns can help a company’s leadership better manage the audit and respond to questions about specific claims. Business owners and other taxpayers facing an audit or similar tax issues technically have the right to bring a lawyer to represent them during any interaction with the IRS. Having professional support may help people avoid situations in which they misrepresent themselves or let their emotions dictate their response.
(Maybe) set time aside to meet
Some audits will require communication via mail and the submission of records directly to the IRS. Other audits may involve a professional coming to the business or the business owner going to an IRS location. Regardless of which approach is necessary, business owners should be aware of the possible risks and proactive about protecting themselves and their business’s finances throughout the process. An audit does not necessarily result in financial penalties or prosecution, although people should be aware of the risks.
Ultimately, responding appropriately to notice of an upcoming audit can reduce the likelihood of a poor outcome.