Tax audits are on the rise as the government steps up IRS enforcement to fund deficit-reducing activities. Individuals and businesses - both big and small - can be financially crippled in the current economic downturn if they fail to meet their tax obligations. With business audits on the rise, it is more important than ever to know what triggers an audit, how to avoid being audited and how to get tax help if the IRS is after you.
For anyone planning to start and/or grow your business, it is crucial to know how to avoid tax trouble, especially payroll tax problems. I know this because I am a business owner myself. Plus, 25% to 30% of my tax relief clients are small businesses with tax problems. I always tell people who are struggling to overcome their tax burdens that knowledge is power and the key to gaining a new lease on your financial life.
What could trigger an audit? The number ONE red flag in triggering a tax audit is claiming false business expenses. Monies from your expenses' payments must be used for legitimate business-related activities. Many people end up in tax trouble when they used these monies for personal purposes and falsely characterize them as legitimate business expenses. This can be seen as a failure to report additional income on your tax return.
Avoid payroll tax problems
Generally, owing payroll taxes is the "kiss of death" for many small business owners, whether they operate their entities as a sole proprietorships, corporations ("C" or "S" - doesn't matter) or LLCs. Many lose their businesses. When it comes to payroll tax debt, the IRS has unyielding power and authority to collect. They have the power to padlock your front doors, putting you out of business, without obtaining a court order.
Hire a good bookkeeper and accountant to avoid IRS tax problems
One easy way to avoid tax problems is to hire a good bookkeeper. You should have a capable bookkeeper that knows double entry accounting. Also, hiring an expert CPA or EA to prepare your return is a small annual investment that can pay off big! I would not recommend doing your own taxes unless you are a straight W-2 wage earner that takes the Standard Deductions (in other words, someone who doesn't itemize or have any unreimbursed employee business expenses).
File your tax return on time, even if you don't have the money to pay your tax bill.
If you can't afford to pay your taxes, you can still file your return on time and save 25% on the failure to file penalty right off the bat. What many people don't understand is that filing an extension just puts off the inevitable, because it's not an extension of time to pay, it's just an extension of time to file. It is also important to know that it's a misdemeanor in this country not to file a legally required return when it is due.
Penalty proof your small business when filing for IRS tax extensions
When filing for an extension, it is important to avoid underpaying your taxes. If you are forced to file an extension (due to not having all your information organized) you must send a check with the extension (less what you withheld or paid in through estimated quarterly taxes in 2008) equal to 100% of your total tax liability for 2007 to avoid underpayment of tax penalty. You may also penalty proof yourself by paying in 90% of what you think you are going to owe for 2008.
What do I do if I get audited?
The best thing to do is get professional tax help! Fighting the IRS on your own is a "lose/lose" proposition. You WILL get "creamed". It's like to going to court without a lawyer. You will need a seasoned tax professional who is a Certified Tax Resolution Specialist to represent you before the IRS and help you put together a tax relief action plan. An ethical and experienced tax resolution company can help you reduce your IRS debt by qualifying for an offer in compromise settlement - where the IRS will accept a much smaller lump sum for the total debt that's owed if you can prove that you do not have the future ability to pay the IRS off. Other tax resolution strategies include monthly IRS payment plans, computational abatement of penalties, abatement of penalties due to reasonable cause, and analyzing the statute of limitation to assess.