Now that 2016's in full swing, it's time to start thinking about your taxes. Actually, it's well past the time when you should have started thinking about your taxes, so it's really important for business leaders to get going here.
Inevitably, there are two key questions that just about every company has when it comes to filing its taxes:
- How can I save as much money as possible?
- How can I avoid an audit?
In this article, we're going to take a quick look at the second goal. Here are five tips and recommendations to help your business avoid an audit as you get to work on your 2016 tax filings.
1. Stay honest
You could probably see this one coming, but it still needs to be addressed. Trying to cheat on your business taxes - even a little bit! - is likely the single worst thing you can do if you want to reduce the risk of an audit.
"The risks of filing inaccurately are far greater than the rewards."
Obviously, this applies to the numbers you're reporting. Don't change the facts - report your income and expenses as accurately as you can. The risks of filing inaccurately on purpose are far greater than the rewards.
That's the most straightforward type of dishonesty. Just as importantly, don't try to go for deductions if you know that you're not really qualified. This may not seem as bad as actually changing the numbers, but the resulting audit can be just as painful.
2. Prioritize organization
One of the most common reasons why business leaders get into trouble with their taxes is because they lack organization. If your records are sloppy and poorly labeled and filed, you're inevitably going to have a lot of uncertainty when filing your taxes. You may have to resort to guesswork and estimates - and those tend to raise eyebrows at the IRS.
Conversely, if you are very organized, you'll have the confidence you need to back up all of your claims with accurate data. Not only will that provide piece of mind - it'll prove convincing for potential auditors, as well.
3. Go above and beyond for documentation
On a related noted, a good rule of thumb for any business leader filing taxes is to go above and beyond when it comes to documentation. As The Motley Fool contributor Matthew Frankel pointed out, this is particularly important when it comes to tax deductions or credits, especially the larger ones. After all, it's only natural for the IRS to take a close look at any such claim, and to be skeptical. At the same time, though, Frankel emphasized that businesses - and individuals - shouldn't hesitate to take advantage of any tax breaks they've earned.
By being exceedingly thorough with documentation, though, you can confidently take advantage of the tax deductions and credits you deserve without increasing the risk of experiencing the headache and stress of an audit in the months that follow.
4. Double check everything, then check again
It is incredibly important for business owners to double- and triple-check all of their figures when preparing a tax filing. This is the No. 1 recommendation that Legal Zoom contributor Jane Haskins offered for business owners looking to avoid a tax audit. Haskins pointed out that if the numbers don't add up perfectly, that will attract attention from the IRS, leading them to look closer at the tax filing as a whole. If, on the other hand, all of your figures are accurate and make sense, then there will be far less incentive for an IRS agent to take the time to closely examine your tax filing.
5. Make quarterly tax payments
Making quarterly tax payments is another powerful strategy for business owners to avoid experiencing an audit, according to Haskins. The writer argued that this was particularly important for any business owner who expects to owe $500 or more by the end of the year. If that's the case, then you need to make these quarterly payments. If you don't, you're going to seriously increase the chances of an audit, and you may face penalties as well.
By following these best practices, business owners can stop worrying about the threat of an audit and focus instead on running their companies.