If you thought the IRS was being lax on auditing small businesses in the past, they will be increasing their audits by 50 percent in 2021. Due to recent tax laws and the economic stimulus response to COVID -19, business tax calculations will be much more complicated.
This may involve more audits for businesses that range from traditional brick and mortar family businesses as well as the influx of newly formed online retail sites launched to offset the pandemic.
The IRS is hiring more auditors who specialize in these types of businesses and will begin enforcing compliance by Feb 2021. Below are tips recommended by ICPAS that you need to be aware of to avoid a costly audit.
- Make sure your records are accurate and report all income, deductions, credits, expenses, and other items as detailed as possible.
- Stick to standard deductions. Anything unusual will raise red flags for auditors. If you believe uncommon deductions are warranted, check with your CPA first for guidance. For instance, reporting losses for three years or more may cause suspicion and activate an audit.
- Go for estimated tax payments. If you believe you will owe more than $500 in taxes for your business, make quarterly estimated tax payments. If you fail to make those payments, you could be risking an examination and penalties.
- Take advantage of digital bookkeeping. There is advanced software available to keep your records secure as well as accurate. This can save time and help your CPA prepare and file your tax returns electronically. It prevents mistakes that could put you at risk for an audit.
- Know what the rules are. If you have a partnership, find out if yours is subject to the Centralized Partnership Audit Regime. It was introduced by the Bipartisan Budget Act of 2015, which changed IRS partnership audit procedures dramatically.
It is always best to involve your CPA to help you navigate recent tax laws and audit complexities to make the best decisions for your business. They are trained to help small business owners plan ahead for the future. Reach to Kevin@kevinthompsoncpa.com for more information and guidance on these and other matters affecting your business.