While it is true that mistakes are inevitable, many businesses dread a tax audit and would do everything to avoid it. However, new solutions such as audit shield now exist to help businesses protect themselves from the effects of tax audits. In the first place, you need to remember that you are human first and then a business owner. Simply try to be as accurate and complete as possible to avoid common mistakes in your tax returns, which may call for a tax audit.
Types of tax audits
Tax audits exist in three different forms:
· Through correspondence: in this form of audit, the IRS may ask for a confirmation, correction, or more records
· Office audits: in this situation, you visit the IRS offices with specific documents
· Field audit: in this case, tax officials come to your business premises. It is more comprehensive. The officials will ask for specific documents and reports
Know the limits on collections and audits
It is important to know the limits regarding audits and tax collections. Your accountant is in the best position to give you more information about this. For example, business audits and personal tax returns can take place after three years of filing. Accounting firms have access to audit insurance solutions such as audit shield, which is helpful for businesses. The solution can protect your business from the cost of a tax audit activity.
Preparing for a business tax audit
When you receive a request for a tax audit, the first step to take is to inform your tax accountant or advisor. Tax audit issues are tricky and even a simple letter asking for a particular document can signal a big problem. Fortunately, various solutions exist for businesses to protect themselves from the effect of a tax audit. An example of such solutions is the audit shield. The following steps are necessary:
· Concentrate on lost or damaged records. Have a proper explanation or documentary of your efforts to recover the lost or damaged information.
· Understand planned and unintentional failures: for instance, the tax department can be lenient if the failure was accidental, but they impose heavy fines on intentional failures.
· Separate personal expenses from business records. Rely on your accountant or tax advisor to help you go about this, such as bank accounts, credit cards, or travel expenses.
What the tax officials focus on
The tax officials focus more on their businesses and their activities. For example, if you operate a cash business, you are more likely to receive tax audit requests. It is difficult to prove the income of a cash business without conducting a tax audit.
In that case, you should be ready to show appropriate documents for travel, entertainment, and meals for your business. The tax department targets such expenses. Be ready to explain the business purpose of the mentioned expenses. Besides, the records must have details including time, date, and the people involved. In essence, it must have a business purpose.
Overall, it is advisable to cooperate with your tax advisor throughout the entire process.