IRS Increases Small Business Audits in 2021

Years of surprisingly low audit examination rates have ended with an announcement from the IRS that the number of small business audits in 2021 will increase by fifty percent. Regardless of recent changes in tax law and uncertain effects of economy-stimulating programs, the IRS will be focusing on small businesses and their investors during the upcoming year.

To aid in its initiative to ramp up enforcement efforts, the IRS will hire 50 specialized auditors by February 2021. These reinforcements will help the government agency efficiently audit parties that have historically been difficult to audit, like partnerships and pass-through entities.

The IRS can audit returns up to three years old, and if notable issues are found in the taxpayer’s filings, older returns can be examined. Insogna CPA advises small businesses to protect their businesses from an audit by following these 5 pieces of advice:

  1. Maintain organized records: To avoid being flagged for an audit, ensure that you report all income, deductions, credits, expenses, and other important numbers. Additionally, make sure that you can produce enough documentation to support what you have reported.
  2. Watch your deductions: Out of the ordinary itemized deductions warrant a closer look from auditors. Find a licensed CPA to help you if your small business wants to claim unique deductions or report losses. Don’t forget that reporting losses for three years or more can raise your chances of an audit to verify that your business is legitimately running.
  3. Pay estimated taxes throughout the year: Calculate how much tax you can assume to pay throughout the year and make quarterly tax payments. Not making estimated tax payments during the year raises your chances of an audit or related penalties.
  4. Try digital bookkeeping: Bookkeeping technology enables you to stay organized, accurate, and secure. In turn, this will help your CPA file and prepare your tax returns with precision. This will help your small business avoid triggering an audit for unintentional bookkeeping mistakes.
  5. Familiarize yourself with the rules: Do you know what category your business falls into? If your small business was formed as a partnership, take the time to ascertain if you are affected by the Centralized Partnership Audit Regime put into place by the Bipartisan Budget Act of 2015. This Act made significant changes to IRS partnership audit procedures.

Staying on top of complex updates and changes to tax law and audit can be extremely difficult for small business owners. This announcement reinforces the importance of properly tracking your financials and making sure your taxes are reported  accurately. Employing the help of a CPA can be the difference between avoiding an audit and being flagged for one.

Want help safeguarding against small business audits in 2021? Contact Insogna CPA to work with a team of experts experienced in small business taxes.