How To Survive Tax Audits – Small Business Survival

Cyprus accounting knows that the tax audit is the most feared examination an individual or more importantly, a business has to face. For the unaware, a tax audit is nothing but the review of your tax returns to see whether you are paying the amount, you are supposed to. Not everyone has to face the examination that is what makes it even scarier as you wonder, “Why did they choose me?”

Although the IRS does not categorically reveal why they choose a certain business for a tax audit, the following might give you an idea.

How To Survive Tax Audits - Small Business Survival

DIF Scoring

A computerized score is assigned to every tax return filed known as the Discriminant Index Function score. The higher the score the more likely you will be called for an audit. Supposedly, factors like deductions being higher than reported income boost the DIF score.

Examination Referral

Often your business might be selected for an audit just because a company you work with is going through one. If company A pays a certain amount to company B and company B’s records do not reflect the earnings, company B might be called for an audit.

Now the question is how to protect oneself from an audit? Cyprus accounting shares a few tips.

The Hobby Loss Argument

As per the Internal Revenue Code Section 183, if you are pursuing a hobby with no aspiration for profit, the losses incurred cannot be deducted as a business loss. Now the tax-payer and the IRS maybe of different opinions on whether an activity is a hobby or a business. For example, if an activity sees two years of loss and three years of success, it is a business while an activity that sees profit in only one year out of five is a hobby.

To prove that his or her business is indeed a business, a taxpayer can argue that the business is seeing loss because of economic downturn, or the loss of a sizeable client, or some other temporary factors. He or she can even present some advertising campaigns or a well-crafted marketing plan that promise profit in the coming years.

Claim Missed Deductions

An audit is a great time to file deductions that you may have previously overlooked. Many businesses overlook or are not aware of many deductions they can avail. Here is a quick guide.

Home Office Business Deduction

If a business owner uses his home regularly for business purposes, he or she is liable to deduct expenses.

Business Mileag

The IRS allows a standard deduction of 55 cents for per mile travelled. The business owners could also choose to deduct actual car expenses like gas, insurance, repairs, etc. You need to specify which method of deduction you will choose so first calculate which option has higher returns.

Business Gifts

There is a provision to deduct up to $25 per gift received in the course of a business.

Gather Proof of Deductions

Many people are unaware that the IRS allows third party documents, oral testimony and other forms of verification methods as proof of expenses, so even if you do not have the original documents, there is still hope.  For example if you do not have records for certain transactions made in the business year, you can fall back on bank or credit card statements. Often if you have a good rapport with the vendors, you can even request another proof of payment.

Last Resort

If your head is muddled with all this information and numbers “gives you the creeps”, then it is better to handover this often arduous task to a professional. Why take a chance with the dreaded IRS!

This article is written by Evans who is associated with that offers audit and reporting in Cyprus.