It’s more important now more than ever for you to know how to prevent the IRS from targeting your business!
According to Donald T. Williamson, a professor of taxation at American University’s Kogod School of Business;
“The “random” audits of small businesses and their owners’ tax returns by the U.S. Internal Revenue Service (IRS) to find unreported income has left the small business taxpaying community feeling like they are being picked on and unduly forced to go “through the wringer.”
Williamson goes onto say that the growing number of IRS audits seem to disproportionately target small business taxpayers!
One of the ways, the IRS targets businesses is by looking at business losses reported.
In this blog post, we’ll go over what you can do to prevent the IRS from targeting your business.
1. Know Your Rights
As a taxpayer you need to know that you have rights; rights existing in Taxpayer Your Bill of Rights, designed to help you when having to deal with the IRS.
You have the right to know what you need to do in order to comply with tax laws!
As a result, this means you’re entitled to clear outlines, explanations of the tax laws and procedures the IRS uses in all forms, instructions, publications, and notices.
2. Get Your Numbers Right
Keep in mind that when you’re issued a tax form for income reported, such as 1099, the person or entity issuing the form to you, report that information to the IRS.
Because of this, the IRS expects the numbers on your tax return to match what they’ve received from third parties.
Making sure your numbers are correct will help you prevent the IRS from targeting your business.
3. Don’t Report Business Losses Every Year
Excess business losses on your tax return can result in you being audited by the IRS.
If you report a net loss in more than two out of five years, you’re a likely candidate for a tax audit.
As a result, the IRS may determine that your business is a hobby and disallow all your business expense deductions.
The IRS is on the lookout for tax shelters and money-losing activities like business losses sound the bell at IRS headquarters.
So, it’s important for you to know how they differentiate business losses from money-making hobby activities in order to prevent the IRS from targeting your business.
4. Claiming or Not Claiming The Home Office
Claiming your home as an office used to be a major red flag, but these days you can effectively do so if the space used in your home legitimately qualifies.
Your home office needs to be a room exclusively used for business.
For example, a separate additional bedroom converted into an office space or a den inside your home fits the bill.
Putting a desk in a corner of your living room, where you spend your living time would raise a red flag with the IRS.
It’s important to know that if you rent office space, you should not claim a home office on your tax return.
Do one or the other, not both!
5. Make Your Tax Payments Quarterly
If you the total you owe is more than $500 in business income taxes in a year, then making quarterly small business tax payments is a great way to prevent the IRS from targeting your business.
Not doing so, could make you a target for a tax audit.
Finally, keep good records and if you’re unsure of what you can and cannot deduct on your tax return; call us to set a free consultation.
Because it’s always a good idea to seek expert advice from a tax professional.
