We all know taxes are a necessary part of our lifestyles. We need schools, emergency services and government. What we really don’t need as small and medium business owners is a comprehensive tax audit. Tax audits are a very lengthy and involved process, which usually calls for the services of a professional, so if there is any way to avoid being highlighted as a company that requires such an inspection, you can be sure your profits and costs will benefit from taking the appropriate action. Here are 5 top tips to help you avoid becoming one of this year’s tax audited companies.
1. Complete your return thoroughly and competently
Tax returns with calculation errors or prices of information missing will immediately flag you up to the tax authorities as someone who needs some help and an inspection. Make sure whatever you declare on your tax return can be easily matched up with what you have filed on PAYE or any other payroll system you are using, and be sure to fill in the form legibly, as forms the computer can’t understand will automatically be sent for checking.
2. Include ALL income, even that which you feel is insignificant
Whether you loaned the services of an employee to a business associate for a week, or sold your old computers on eBay, all these incomes should be stated on your tax return whether you deem them to be important or not. Similarly if you had capital in the bank that was accruing interest, or got paid on dividends during the last financial year, the best strategy is just to declare it all and then there is no grey area to investigate.
3. Check your income compared to last year
If you suddenly have an abnormally high income compared to last year, or even a really low one, this can raise a red flag to authorities and instigate further investigations to be made. If you have genuinely had a very different year to last year, then this just has to be swallowed and the potential for a full tax audit has to be dealt with, but if you are reporting an unusual income because of miscalculations or omission of some expenses, this should be easy to fix.
4. Itemized deductions
Of course you are entitled to the usual tax deductable expenses, whether these be cars, equipment or sustenance. However, be aware that if these deductions run to several pages of listings you will invariably be investigated by the auditing authority as this can highlight a potential problem to them.
5. Self employment
You can’t help working for yourself; indeed it is a commendable achievement. However, it does put you in the firing line for a tax audit, so make sure you have all your books in order all year round, so that audit time is not a stressful experience for you. If you have a small business that continually shows losses, the tax authorities may well start investigating deeper, so make sure anything you have put down as expenses actually is an expense relating to the business.