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No business wants to receive an audit notice from the IRS. While some audits are random, many are triggered by inconsistencies, red flags, or errors in tax filings. By following best practices in tax compliance and financial management, you can significantly reduce the likelihood of an audit. And in light of the recent layoffs at the IRS and the potentially extended delays in resolving issues, it’s more important than ever to prevent an IRS audit from happening. Here’s how to keep your business IRS-compliant and avoid unwanted scrutiny.
1. Maintain Accurate and Organized Records
Good recordkeeping is your best defense against an audit. Keep all financial documents, including receipts, invoices, payroll records, and tax filings, organized and accessible for at least seven years. Using accounting software or working with a professional bookkeeper ensures accuracy and completeness. Keep digital copies of important documents to prevent loss or damage.
2. Report All Income
Underreporting income is one of the quickest ways to trigger an audit. The IRS cross-references tax returns with 1099 forms, bank deposits, and other third-party reports. Any discrepancies could prompt an audit. Ensure all revenue sources are accurately reported, including cash payments, and reconcile bank statements with financial records.
3. Double-Check IDs When Submitting Forms
Incorrect or mismatched identification numbers, such as Social Security Numbers (SSNs) or Employer Identification Numbers (EINs), can lead to rejected filings and increased IRS scrutiny. Always verify employee and contractor tax IDs before submitting W-2s, 1099s, and other tax forms.
4. Be Careful with Deductions
While deductions help reduce taxable income, excessive or unusual deductions can raise red flags. The IRS closely examines:
- Home office deductions: Ensure the space is used exclusively for business.
- Meals and entertainment: Only claim legitimate business-related expenses with proper documentation.
- Vehicle expenses: Keep detailed mileage logs and separate business and personal use.
Avoid claiming deductions that are disproportionately high relative to your revenue.
5. File and Pay Taxes on Time
Late or inconsistent filings can increase your chances of an audit. Frequent extensions, amended returns, or late payments signal potential problems to the IRS. Set reminders for tax deadlines and work with a CPA to ensure timely and accurate filings.
6. Pay Employees and Contractors Correctly
Misclassifying employees as independent contractors to avoid payroll taxes is a common IRS red flag. Ensure that all workers are classified correctly based on IRS guidelines. Use Form W-2 for employees and Form 1099-NEC for independent contractors, and review IRS classification rules carefully.
7. Don’t Ignore IRS Notices
If you receive an IRS notice, respond promptly. Ignoring correspondence can escalate issues and increase penalties. Many audits begin simply because a business fails to address an IRS inquiry. Read all IRS notices carefully and consult a tax professional if you’re unsure how to respond.
8. Work with an IRS Authorized E-filer
Partnering with an IRS-authorized e-filer payroll provider helps ensure compliance with payroll tax regulations, accurate wage reporting, and proper tax submissions. These providers handle payroll taxes electronically, reducing the risk of filing errors that could trigger IRS audits. Choose a payroll provider with expertise in IRS regulations, electronic tax filings, and compliance best practices. A trusted payroll partner can help avoid penalties and audit risks related to payroll taxes and employee misclassification.
Conclusion
While no business is completely immune from an audit, following these best practices can significantly reduce the risk. By maintaining accurate records, filing taxes correctly, double-checking IDs, and responding to IRS notices, your business can avoid unnecessary IRS scrutiny and stay on track for success.
Let GTM Help Protect Your Business from an IRS Audit
As an IRS authorized e-filer, GTM helps businesses of all sizes ensure IRS notices are responded to quickly, employees are properly classified, taxes are filed and paid on time, and much more. Plus our clients enjoy dedicated, personalized customer service that has given us the best reviews in the business. Download our payroll platform brochure below, and request a free quote to learn more.
