4 ways to beat small-business tax audit

Take time to review your return under audit, or have an accounting professional review it for you. A business can deduct expenses that are ordinary and necessary in carrying out the trade or activity. This is a great time to submit documentation for overlooked deductions. Such deductions may reduce the taxpayer's liability or possibly generate an overpayment of taxes, which can offset any deficiencies determined by the IRS.

Common missed business expenses include:

Home office business deduction. If a taxpayer has a home office that is used exclusively and regularly for that purpose, the business may be able to deduct expenses related to the use of the home.

Business mileage. Businesses should keep a mileage log of business-related travel for the taxable year. The IRS allows for a standard deduction rate of 55 cents per mile traveled. Or the business can choose to deduct actual car expenses, such as insurance, repairs, gasoline and oil. Taxpayers should determine which method would provide a higher tax deduction.

Business gifts. Generally, a business may be able to deduct up to $25 per gift given during the course of a business.

For more information regarding business deductions, review IRS Publication 535, "Business Expenses."

3. Be creative in substantiating your deductions

Just because your business may not have certain documents to substantiate expenses on the tax return does not mean all is lost. Keep in mind that the IRS allows for third-party documentation, oral testimony and other forms of verification substantiating expenses.

For example, if a business lacks documentation to support business mileage reported on the tax return, consider using Google maps, clients' records and past invoices to estimate mileage traveled during the taxable year in question.

Also, if you have reported certain expenses but no longer have receipts or documentation to document these items, take time to retrieve prior bank records or credit card statements. It is also beneficial to make contact with vendors to request proof of payment

4. Get professional help

If you feel overwhelmed by the mere mention of the IRS, it may not be a bad idea to get a tax attorney, accountant or enrolled agent to fight on your behalf. That way, you can remove yourself, emotions and fears from the equation completely.

In addition, it also requires the IRS to make direct contact with the agent on your behalf. Begin by submitting Form 2848, "Power of Attorney and Declaration of Representative," to the IRS.

But before signing your name on the dotted line, take time to research the tax professional to determine whether he has the qualifications and/or experience to tackle your audit case.

Question whether he ever has represented others before the IRS and how many cases have been successful. Get a clear understanding of the fees charged for representation during an audit. And more importantly, speak with other clients to obtain an understanding of their experience with your designated tax professional.

Kemberley WashingtonWe would like to thank Kemberley Washington, CPA and assistant dean of student programs at Dillard University in New Orleans, for her contribution.


Show Bankrate's community sharing policy
          Connect with us

Connect with us