What Is an Auditor Looking For?
While no one actually enjoys paying taxes, it's important that you pay all of the taxes that you are obligated to pay. Making deductions can help to lower your taxes, as long as you make sure they are valid. In the case of business taxes , deductions are based on business expenses. These deductible expenses depend mainly on the type of business in which you're engaged, but most valid expenses related to running your business are deductible. Failure to properly deduct business expenses, or attempting to deduct personal expenses through your business, can result in an audit. Below is a list of things that auditors usually search for when auditing a business. For more information related to this topic, you can visit FindLaw's section on Business Taxes.
Did you report all business income, including all property, goods, cash, and services that were received by your business?
Are you living a life that is more extravagant that what your income appears to warrant?
Did you deduct any personal expenses as business expenses? For example, commuting to and from work is a personal expense, not a valid business expense. Also, auditors will pay close attention to business expenses that relate to meals, travel, and entertainment so when you make these types of deductions make sure that they are truly business-related.
Were all of your business expenses deducted in the correct year? Tax rules address when business expenses can be deducted. Generally, a current expense must be deducted in the year that it was incurred, while a capital expense may have to be deducted over a longer period of time.
Are any of your business expenses more extravagant than what your type of business would usually incur?
Do you do any business with relatives or a business they own? An auditor will look at any business transactions between "related parties" to make sure that it was a valid business expense and not simply a shifting of taxable profits to a family member.
Have you met your employment tax and withholding obligations, and made your required tax deposits in a timely manner? This includes making sure that you classify employees and independent contractors correctly.
Do your business records match up with your business checking account? Even if your business is being audited, the auditor has the right to see both your business and personal financial records.
Do you keep complete financial records? It's a good idea to keep complete and organized records for both business and personal records.
If your business is required to pay a sales tax, does the amount of sales tax paid match up with the sales documented in your business records?
Getting Legal Help
While there are no guarantees you will never be audited, paying your share of taxes -- and paying them on time -- can help decrease your chances of being audited. An attorney can help you review your business's financial records to determine if there are any red flags that auditors commonly look for when auditing a business. If you have any questions or concerns about business taxes and audits, or for other legal help starting and running a business, you may want to contact a business organizations attorney in your area.