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in Business

Is The IRS After Me? How To Ensure Your Business is Playing By The Rules

Apart from scrutinizing your accounting information when you file for taxes each year, the IRS (Internal Revenue Service) is watching you in ways you may not imagine, so be careful of taking any liberties when it comes to financial reporting – especially in the areas of claiming expenses.

Careful monitoring of business transactions and even social media can help the IRS build a picture of a business’s financial dealings, and flag up discrepancies between what they should declare and what they actually do declare.

Good record keeping

Ensuring you’re playing it straight with the IRS starts with good record keeping. Record everything and ensure you use and retain the correct paperwork such as W-2, W-3, 1099 forms and others to accurately record what you paid in salaries and contractor fees.

Ensure receipts for all that you’re claiming as expenses are to hand and clearly identifiable. The key is in showing you have nothing to hide and aren’t trying to claim for items not appropriate as legitimate business expenses.

Keep records for at least six years. If you’re audited by the IRS it can ask to see records for that period.

Understand paperwork

Be fully aware of what paperwork is required and what it means.

For example, a 1099 form is generated by a payer to inform you of money or profits due to you, such as, if you’re a freelancer or contractor your customer would complete one (a 1099-MISC) showing what they paid you.

Bear in mind the IRS will also receive a copy so they’ll know your income from this source, so don’t even think about missing it out on your tax return and supporting paperwork.

The same applies to other 1099 forms recording other incomes such as dividends, interest or even debt removals.

The services of a tax professional

An experienced accountant to ensure you’re claiming expenses appropriate for your business, and conducting your financial affairs and record keeping properly, is money well spent – and a deductible business expense – so find a suitable professional.

They can certainly help should the IRS wish to investigate you in terms of an audit or similar.

Record all work undertaken

You may be tempted, for example, to not declare or to under declare that piece of work the customer paid cash for. Even if you didn’t provide a receipt your customer may have recorded it somewhere. The IRS could spot this then notice it doesn’t appear anywhere in your records, prompting questions.

The IRS is particularly vigilant regarding cash businesses. If you’re that type of business, such as a hairdresser or beauty salon owner, keep scrupulous records and beware of assuming cash can disguise real earnings.

Claims not commensurate with your work

The IRS has various computer programs and checking mechanisms to ensure businesses ‘behave’ appropriately relative to their work habits.

For example, an art or antiques dealer may typically spend around 15 per cent of their income on travel as that’s the norm for the trade. If you’re claiming significantly more than is ‘normal’ this could alert the IRS to look into your affairs in more depth.

Do the math but don’t worry about it

While accurate calculations are important, it’s often the inappropriate way expenses are claimed and affairs are conducted the IRS is concerned with.

In general, don’t take liberties, beware of key IRS audit triggers, and ensure you claim fairly for business expenses (ask your tax professional for guidance). If you do, you’ll be playing by the rules and keeping the IRS happy.

To read more on topics like this, check out the business category.

Filed Under: Business

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