After years of low examination rates, the IRS has recently announced that they are planning to increase audits of small businesses by about 50% during the 2021 tax year. They are even planning to hire more specialized auditors to strengthen their enforcement efforts in order to accomplish this increased audit rate.
Although the possibility of being audited by the IRS can seem daunting, much can be gained by being prepared. Make sure your business is following these best practices in order to bolster your success in case of an audit:
- Keep clear and detailed records. We recommend scanning and keeping records digitally for easy reference and maintaining these records for at least 7 years.
- Carefully review business expense deductions you have reported. Ensure you have backup support for each purchase and that you can relate it logically to a business expense. Familiarize yourself with the most recent IRS rules regarding allowable businesses expenses.
- Make all estimated tax payments by their respective due dates.
- Issue the proper annual forms in a timely manner to subcontractors and employees, such as 1099s and W2s and timely file such forms with the correct tax authorities.
- Prepare and file any required sales tax returns.
- Set up annual business minutes to reflect significant operational events such as support for “reasonable” salary for S-Corporation owner/employees.
- Set up internal business related plan documentation such as a written out-of-pocket business reimbursement plan.
- Prepare proper documentation to support related party transactions such as rental agreements and independent contractor agreements. Any loans should also be documented with the stated interest rate.
- Review and revise Bylaws and/or Operating Agreements in light of possible changes in the law.
- If your business is taxed as a partnership, make sure to review the IRS Centralized Partnership Audit Regime rules and prepare a Partnership Representative Agreement.
- Work with a qualified and competent tax preparer.
If your business is selected for an audit, do not ignore it. Make sure to respond promptly to the IRS.
Our office has over 20 years of legal and tax experience in representing individuals and their businesses in front of the IRS and other tax authorities. We are here to help you and your business obtain the best results in case of an audit.
If you should have any questions regarding an audit or any other legal or tax matter, please feel free to contact me.
Jeffrey Cohen, Esq., C.P.A.
The Cohen Law Firm, P.C.