Top Audit Risks You Can Avoid with The Right Accounting Talent in Place
As a business owner, you want to do all you can to avoid being audited. Although the IRS has every right to thoroughly review your company’s income and expenses, it takes a significant amount of time and money to answer questions, prove you made the reported amount of money, and are due specific deductions. That time and money could be better used elsewhere. Fortunately, with the right accounting talent in place, you can avoid certain risks that may trigger an audit.
Reporting a Net Loss in More Than Two of Five Years
If your company does not report three years of profits in a five-year period, you increase your odds of being audited. The IRS requires that a business make or attempt to make a profit. If it is costing more to run than it is bringing in, you must show that you are running the business with the intention of making income. Having a business plan, marketing campaign, and profitability projections can show you are running a business.
Consistently Filing Late Returns or Paying Taxes Late
If your company fails to follow filing requirements and meet deadlines, you are more likely to get audited. An employer has a fiduciary responsibility to withhold payroll tax and transmit tax in a timely manner. As a result, you have to file payroll tax returns for all employee compensation. The amount reported as your total compensation expense for income tax returns needs to match the amount reported for payroll tax. If you anticipate owing a minimum of $500 in taxes for your business by year-end, you need to be making estimated quarterly tax payments. Failure to do so may result in penalties and increased risk for an audit.
Paying Unreasonably High Salaries
If you or your shareholders who are employees receive unreasonably high salaries, your chances of being audited increase. Corporations may deduct executive pay, making it appear to be tax-free income at the corporate level. The salary typically is supplemented with dividends that are taxed at both the corporate and personal level. Since overpaying a salary is how some corporate executives try to avoid the double-taxation issue, the IRS studies how much of an executive’s pay is considered salary and how much is in dividends. In contrast, since the pass-through structure of an S-corporation lets income flow through the company directly to the business owner, and that profit typically is not subject to payroll taxes, some owners attempt to underpay themselves to minimize the total payroll tax withholding.
Decrease Audit Risks with Accounting Talent from Marco Management Solutions
Marco Management Solutions, part of Chicago’s leading accounting and finance recruiting and consulting boutique, has the accounting professionals you need on a project, interim, and consulting basis to reduce your risk of being audited. Reach out to us today so we can learn more about your company and its needs.