After years of low examination rates, the IRS announced it will increase audits of small businesses: by 50 percent. This news comes during a time when complex tax law changes and economic stimulus programs in response to COVID-19 have made businesses’ books even more complicated than usual.
The IRS plans to hire more specialized auditors by February 2021.
Here are some tips in the event of an audit:
- Keep clear records: Report all income, deductions, credits, expenses, and other figures. Make sure you have adequate documentation to support the figures reported.
- Mind your deductions: Unusual deductions raise red flags for auditors. Also, reporting losses for three years or more could increase your risk of an examination into whether you’re actually in business.
- Make your estimated tax payments: If you anticipate owing more than $500 in taxes for your business entity throughout the year, you should be making quarterly estimated tax payments.