How Can Companies Minimize the Risk of an Income Tax Audit?

A tax audit is a stressful event for most business owners. Even if you believe you’re doing everything correctly, it might be daunting at times.

Also Read: Income Tax Return Filing

Experts agree that accurately declaring the income, deductions, and losses you intend to claim is essential. Failure to do so could lead to negative implications for your business, such as liens and closure.

We’ll walk you through tax audits and how to minimize your chances of being audited in this article.

How to lessen your chances of being audited by the IRS

Small business owners have additional tax obligations in addition to those of regular employees. With so many different forms and deductions, it’s easy to overlook or miscalculate tiny things.

While there is no way to totally avoid a tax audit, there are steps you may take to lessen your chances of being audited.

Here are nine wise practises to implement if you want to reduce your chances of being audited.

Don’t use roundings when quoting numbers.

When it comes to tax returns, small businesses make a typical error. They round numbers to make calculations easier. As a result, there are minor irregularities, which contribute to large computation errors. The Income Tax (IT) department will be alerted to any calculation inaccuracies.

Pay your taxes on time.

Always submit your taxes on time, even if that means starting at the beginning of the year (January). Filing your taxes late can result in unpleasant attention from the IT department, in addition to a penalty fee.

Get to know the average earnings in your field of employment.

Small business owners who offer employees stock in their company must be careful to provide them a fair wage. The IT department is interested in high earners who are also stockholders since this is considered as a deceptive approach to reduce taxes by undercutting profits.

Don’t report year-over-year losses.

If you record losses in more than two of the last five years, you may face a tax audit. Authorities may misinterpret your company as a pastime and refuse to let you deduct any business expenses.

Make sure your social security numbers are correct.

Make sure you’ve supplied the correct Aadhaar and PAN numbers. Inputting incorrect social security numbers on your tax return can trigger an audit.

Understand the laws governing home-office deductions.

Make sure you’re up to date on the home office tax rebate guidelines. The IT department will decide whether your home office complies with the “regular and exclusive” laws. The norm is that you should only use your office space for business purposes. You or your family will be unable to do anything else while you are there, so personal belongings should be kept to a minimum.

Choose a business credit card.

A corporate credit card is a fantastic way to manage business costs. A corporate card allows you to segregate your personal and business costs. This is critical since only business-related expenses are eligible for a tax credit. You may also keep track of all your business spending without relying on staff to submit expense reports. You can provide the same financial documents while filing tax returns. You’ll be able to keep track of all your expenses and avoid a tax audit this way.

Invest in a professional.

The rules governing finance and taxation are extremely complex and difficult to understand. Small firms should seek professional help from a CPA or a tax specialist to help them deal with audit flags.

Keep an eye out for tax deductions for new businesses.

Various incubation programmes are run by governments around the world to assist entrepreneurs. In order to boost entrepreneurship in India, Prime Minister Narendra Modi announced the Startup India programme in 2016. Tax rebates are one of the most appealing aspects of such incubation schemes. As a small business owner, you should be aware of any opportunities to lower your tax liability.
Suggested Read: Income Tax Advisory Services