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5 Facts To Know If Your Business Gets Audited

October 1, 2014

Tax Audit, facts and Myths:

The strike of an audit letter from the IRS can be the worst nightmare that any small business can dream of. The IRS defines an audit as “a review-examination to verify the amount of tax reported is accurate.”

How does the IRS pick Tax returns for audit?

  • Some returns are selected for audit through computer screening. An IRS computer basically compares data from your return to average numbers from people in similar situations and they look for variances
  • Other selected by document matching to see if forms like the W-2 match what was reported on your income tax return
  • And still another group is selected randomly.                                                                                       Jeff Schnepper- author of How to Pay Zero Taxes (McGraw-Hill, 2011)

Be careful with employee classification:

An area where most small business owners get into trouble is classifying their employees.  There is a 20 point test run by the IRS that every employer should use to determine whether or not their employee is an independent contractor or a real employee. For employees that are considered independent contractors, Form 1099 should be filled out properly and only when an employee meets the 20 point test to be considered an independent contractor.  Since independent contractor wages are not subject to state, local or social security tax through the employer, many small businesses have fall victim to hefty fines for classifying employees as independent contractors rather than employees.

Determine what the IRS wants:

A letter from the IRS doesn’t mean you are necessarily being Audited , sometimes the agency is looking for more information or clarification. First thing to do is to determine what part of your tax the IRS is looking for clarification on. IRS auditors will have questions on a portion of the tax return–not the entire thing. Many times you are getting selected because the IRS doesn’t have a lot of information about you.

Difference interpreting your return is not a crime:

If you have kept records, including bills, receipts, and canceled checks, you shouldn’t worry. The IRS may end up interpreting your situation differently than you, but there is no crime in having differences of opinion. Nevertheless, professional help may be in order with an office audit, particularly if you yourself suspect that there are errors or omissions in your tax return.

If you disagree with results of the Audit:

If you disagree with the ultimate results of the audit, there are numerous avenues of appeal that you can pursue. However, at that point, we recommend that you talk to a tax professional to gauge the likelihood of success and the best strategy to use in your particular case

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