Get your business ready for the Inflation Reduction Act
As many as 87,000 new IRS agents will soon be hired with the new Inflation Reduction Act (2022).
What does this mean for your business?
For one, audits on small and medium-sized businesses could be far more likely.
Take steps to get your business audit ready by learning the most common audit triggers and ensuring you’re in compliance.
Common tax audit triggers for small businesses
According to The Hartford, there are six common small business tax audit triggers. Read up on them and ready your business to reduce your chances of getting audited.
Reporting your income incorrectly
Rounding, averaging, or omitting parts of your income might up your odds of being audited. Going forward, make sure that the income you report on your Schedule C is 100% accurate.
Taking more deductions than the average business in your sector
The IRS allows for deductions that can reduce your tax liability, but there are strict rules on what’s allowable. Avoid taking deductions for expenses that aren’t ordinary (or common) in your business and aren’t necessary for your business’s success.
Showing wide variations in year-to-year expenses
IRS auditors may start a formal inquiry when they spot your business reporting far higher—or far lower—expenses from one year to the next. Expenses can certainly fluctuate, but try to keep them in check and to what the IRS would deem “reasonable” for your business.
Engaging in frequent cash transactions
Cash businesses, salons, some service businesses, and restaurants, tend to work with cash more than other similar-sized businesses. If the IRS believes that cash income is going unreported, an audit may take place. Get your business audit ready by keeping excellent records and reporting accurate numbers.
Claiming business losses over multiple years
It’s not uncommon for small businesses to report losses, but doing so year after year is likely to trigger and audit. If your business is struggling in this way, ensure that it’s audit ready by keeping detailed records of your business’s revenues and expenses.
Misclassifying employees
If you have any staff on your payroll who you classify as an independent contractor but meet the criteria of a full-fledged employee, you could be at risk of an audit. Going forward, make sure that you work with your independent contractors to the letter of the law (namely, directing only the result of their work and how it’s accomplished). Keeping excellent records on the work each person performs to make your business audit-ready.
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