Is there any word more dreaded than the “A” word? Many small business owners run for cover at the mere mention of an audit – even if they keep impeccable books and have absolutely nothing to worry about.
The possibility of getting audited holds a sort of mysterious power that strikes fear into the heart of SMBs and individuals alike. The truth is that getting audited is a lot less common than you might think, and more importantly, is probably nothing to worry about.
Here are our top five audit myths, busted!
1. Audits happen all the time
With the amount of fear surrounding audits, you’d think they were a totally common occurrence. According to the IRS, however, only 1% of the population ever gets audited. In essence, you are more likely to be struck by lightning in your lifetime (odds of 1 in 3,000) than be audited.
2. The IRS can’t wait to audit you
Not true. Audits are time-consuming, expensive, and result in a lot more paperwork for everyone involved. Even if the IRS does uncover some shady activity because of an audit, there really is no “win” for them as an organization. They may uncover monies owed, but those monies will most likely equate to the amount of time and resources it took to conduct the audit in the first place.
3. A letter from the IRS = Doomsday!
Audit or not, it’s possible that the IRS might contact you at some point, most likely in the form of a letter. Seeing the Internal Revenue Service on the return address portion of the envelope may very well induce a cold sweat, but chances are there is no reason to freak out. The IRS sends letters because they have a question about something on your tax return. They are simply writing to get some clarification.
In most cases, you will simply need to provide some additional documentation or send some additional money, and that will be that. No harm, no foul.
4. The IRS is looking for red flags
Not exactly. Many small business owners operate under the mistaken belief that certain practices will automatically make them targets of Uncle Sam’s wrath. The truth is that if you are running everything on the up and up, and if your business practices are similar to those of others in your line of work, you’ll have nothing to worry about.
Let’s say you’re a graphic designer and that you work from home. It’s completely acceptable and expected for you to take a home office deduction on your tax return. If, on the other hand, you own and operate an aquarium, a home office deduction could look questionable to the IRS. The bottom line is that you just need provide reasonable cause for whatever you do.
You don’t necessarily need to operate your business in exactly the same way as your peers, but if you choose to do things a little differently, just have a good reason for doing so and keep immaculate records.
5. Only big businesses get audited
Alas, this is simply not so. The IRS audits businesses and individuals of every income level. In fact, they are required to conduct an equal amount of audits within every tax bracket. While the overall number of audits conducted each year is incredibly low, those audits that are conducted are distributed evenly throughout all income levels and business sizes.
As long as you’re making every effort to keep good records and run your business honestly, you should have no cause for concern when it comes to the possibility of being audited. That being said, everyone makes mistakes, and if you overlook an important detail, the IRS will give you a chance to rectify the situation before moving to more serious measures.
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