On March 15th, 2018, Subchapter S Corporation (S-corps, for short), have their tax returns due. This is a quick reminder to you to make sure that your books don’t contain any “hanging chads” that might come back to bite you.
Around this time every year I always receive a few questions like these: How can I make sure I don’t get audited? What are my chances of getting audited? If I take that deduction, will it raise a red flag?
We get these and many more like it, regularly. And look — I am by no means exasperated by the questions. But receiving these questions enough, as I do, means that I should probably write about it.
So, I’ve put together a primer for my North Texas area business-owner clients and friends on avoiding audits, completely.
Here it is — and don’t make the mistake in thinking that just because the IRS budgets have decreased recently for this stuff, that no North Texas area business ever gets audited. Believe me, that is not the case…
What Are My Chances of Getting Audited? 11 Tips For North Texas area Small Businesses
“Let us not look back in anger, nor forward in fear, but around in awareness.” – James Thurber
I will say right up front: If this is overwhelming to you, there’s a simple solution — have a good tax preparer handle all of it for you. But if you want to tackle it all yourself, here’s what you should be doing…
1. Make sure that any third-party income and reports agree with your records.
2. Make sure you have selected the correct forms and schedules to fill out. Ask yourself: Do the forms apply? Am I stretching the situation? Are there credits that I am entitled to whose forms I haven’t included, but need to?
3. Keep track of bank deposits so that all items will be easy to trace. Write the source of the check directly on the deposit slip, especially transfers between accounts, so that these are not inadvertently counted as income.
The first thing tax auditors request are your checking, savings, and investment accounts. They then proceed to do a total cash receipts analysis, comparing the total to the gross income shown on your tax return. By marking every deposit slip, you know where to look for further documentation to support your notation, and the auditor will have the trail in front of him or her, for the source of the unusual nontaxable receipts such as insurance recoveries, loans, gifts, and inheritances. Surprisingly, it’s not that much work, and is worth the effort.
4. Always keep your checking and savings accounts free of irregularities. Be sure you can explain large bank deposits and increases (especially sudden ones) in your net worth. WARNING: If you have unreported income of more than 25% of your adjusted gross income, the auditor may turn your case over to the CID. If you suspect this may occur, do not provide any leads to the auditor regarding the sources of the unexplained deposits. The burden of proof is on the IRS. You do not have to provide leads that make their job easier.
5. Keep your North Texas area business and personal accounts separate.
6. If you know you are going to take a business deduction, pay for it by check.
7. Know the proper time to file. IRS computers are not programmed to review only those returns received before April 17th, 2018. So who is to say that late returns, those filed after the 17th, won’t be audited, or will be audited less than returns mailed earlier?
8. Be thorough. Don’t leave out any information. Sign where you are supposed to.
9. Be neat.
10. Check your mathematics.
11. Balance your total deductions with your income. Extensive deductions that add up to a substantial portion of your total income are audit flags.
Feel very free to forward this article to a North Texas area business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax problem resolution and estate planning for North Texas area families and business owners. And we always make room for referrals from trusted sources like you.
The Bronson Law Firm, P.C.