In addition to an economic slowdown beginning in 2020, small businesses must deal with more complicated accounting because of complex changes to the tax laws and COVID-19 stimulus programs. In an apparent sign of aggressive tax collection after the pandemic and elections, the Internal Revenue Service announced it will increase audits of small business by 50 percent in 2021.
The IRS announcement came after years of low examination rates. It is planning to hire more specialized auditors to improve its enforcement activities by Feb. 2021.
This policy could lead to audits and enforcement actions against small businesses. These include a range of business which include long-held, family-owned operations to online businesses that were established during the pandemic, according to the Illinois CPA Society.
Guidance was provided by the ICPAS to help protect your business interests and avoid an IRS audit. First, business should accurately and truthfully report all income, deductions, credits, expenses, and other figures.
Adequate documentation should support the figures reported on the business information return. This decreases the odds that your individual tax return will be audited or have errors.
Itemized deductions that are unusual invite auditors’ attention because most taxpayers claim the standard deduction. You should seek professional advice if you are seeking unique deductions or reporting business losses. Reporting losses for three years and more can increase the risk of an examination of whether you are operating a business.
New bookkeeping software uses tools that keep business records accurate and secure. This help with electronically preparing and filing tax returns. This digital tool helps prevent filing mistaken returns that lead to an audit.
Knowing the rules is also essential. Many small businesses are formed as partnerships and it is important to determine whether a business is governed by the Centralized Partnership Audit Regime contained in the Bipartisan Budget Act of 2015. This law made significant changes to IRS audit procedures.
Small business owners may reduce the consequences of tax enforcement by seeking legal assistance to prepare for these investigations and audits. An attorney can also help businesses with compliance and represent their interests before the IRS.