As a small business or self employed tax filer, your chances of being audited are somewhat higher than someone merely filing a few W-2s. Part of the reason is that the IRS applies greater scrutiny to certain subsets of tax filers who may be more prone to tax fraud. But it also happens simply because filing taxes for a business is much more complex and there are more opportunities to make a mistake or trigger a red flag. If you run a small business or have an unusual tax situation, it can be highly beneficial to hire a Certified Public Accountant (CPA), not only because he or she can get you more deductions, organize your bookkeeping and identify weak areas in your businesses finances, but also because they can reduce your chances of triggering an audit. Here’s how:
There’s a spot on your tax return for your tax preparer to sign. By having a professional or an outside firm handle your tax return, it gives the IRS a bit more confidence that you haven’t made a mistake.
Depth of Knowledge and Experience
Obviously, a CPA is more experienced about the ins and outs of the tax code and what will be advantageous for you when you file your return. This is even more true if your CPA has specialized expertise in your area of business. Think of it this way: the U.S. tax code is over 14,000 pages long. While its unlikely that your CPA has read it cover to cover, you can bet that he or she has handled a situation like yours and knows which mistakes to avoid – especially if they’ve been practicing for many years.
Legal Entity Advice
CPAs are exponentially more helpful than run-of-the-mill storefront tax preparers because they are also qualified to give business advice. There are many forms that your business can take and a corporation, LLC or partnership is less likely to be audited. A CPA will be able to take a look at your business and tell you whether the benefits of incorporating outweigh the costs.
Covering Your Bases
There’s a right and wrong way to make business deductions. And certain deductions, such as automobile expenses, travel to vacation destinations on business and home offices are more likely to raise an eyebrow at the IRS than others. A CPA will help you record all the proper documentation so that your deductions will stand up to an audit as well as steer you away from deductions which might not pass muster.
Good bookkeeping and timely, accurate and compliant tax returns go hand in hand. Many CPAs are able to set up efficient, reliable systems for year round bookkeeping that will help you streamline payroll, cash flow and other financial matters. Some CPAs can even handle your bookkeeping for you so when tax time rolls around, they already have an intimate understanding of your business’s financial picture and they already have all the information they need.
In spite of following all the best practices and diligently dotting your i’s and crossing each t, audits happen. And in that case, you’ll be much better off if you have a CPA to back you up. By retaining a CPA who knows how to maintain a clear audit trail and can help you explain or dispute contested items on your return, you’ll not only decrease your chances of being audited, but you’ll be well prepared so when the government does come a-knocking, it’ll only be a minor bump in the road rather than an all out crisis.