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| Learn What You Can Do To Beat An IRS Audit |
The factors that contribute to home business complications primarily concern keeping adequate, substantial records that indicate the influx of money alongside reasonable deductions that won't get you flagged for an audit.
Operating a small business can be productive and exhilarating, but such proprietors face a bevy of issues that are unique to “mom and pop” establishments. Add to this the fact that the company is operating from your home and things get even trickier.
For instance, writing off an off-site office as a business expense is a no brainer, as one can establish the need to pay rent, electricity, water and any other related employee housing disbursement. When it comes to a home office however, you have to detail, with all due precision, the increments in which one uses things such as supplies, water, lights, and even the internet for business related purposes. Some may calculate erroneously and in some cases fraudulently, so more often than not, writing such things off can and/or may lead to an IRS audit.
How Would a Home Business Get Pinged for Audit?
The IRS considers and evaluates a home business as it would any other, while being aware of the limitations of such companies. In other words, the criteria may remain the same but not the methodology to factor in potential abuses or mistakes in reporting.
DIF Scoring Rings Audit Bells – if there are enough red flags on your tax return, you could trigger what is known as a DIF (Discriminatory Index Function) flag. The DIF is a mathematical measurement that weighs the possibility of audit based on certain income tax filing characteristics. In other words, if too much is out of whack on the form, it will trigger a high enough DIF to provoke an investigation. This process is utilizes for all types of businesses, but can be problematic for home businesses, where certain nuances, like business expenses and home office space calculations, can be hard to assess properly. With this being the case, even a mindful home business owner can land themselves in IRS hot water.
Regular and Exclusive – Another issue, as discussed previously, is duly calculating the home office space, its requirements and uses. Getting this precisely right is important, as the IRS determines home office use in its tax audit assessments. The evaluation examines how “regular” and “exclusive” office use is in relation to home versus business life. In order for a home office to establish “office/ work viability” the IRS has to look at how regularly the room is used for business and how exclusively it is used for said business purposes. For this reason, there are things one can indicate on one's tax form that could give an agent the notion to investigate the in home set up. This would involve making sure the small business owner observed governmental and tax guidelines, like dedicating the space for work alone e.g. no watching Netflix and having movie nights in the home office.
Examination of 1099 and W2's – a simple yet effective way that IRS agents can assess probable issues is by comparing 1099's or w2's to the tax documents themselves. This easy method of matching will tell an agent right away if there are any pertinent discrepancies in income reporting.
Beat the audit by looking for deductions – If you find yourself in the cross hairs of an IRS audit, it may very well pay to look for deductions wherever you can. Many home business owners do not now for instance that they can write off things like utilities and even business related phones calls. If you have relevant records on hand, they may be able to be used to offset any taxes the IRS may calculate against you.
Locate a Reputable CPA – strong credentials matter, so if your small home business is facing IRS scrutiny, contact a company like GBC Income Tax Service of Atlanta and learn what you can do to beat the odds and increase your chances of a positive outcome.
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