No business owner wants to be audited, and maintaining the proper documentation can both help prevent the Internal Revenue Service from knocking and have the company ready in case they do.
The IRS vigilantly watches for deductions and expenses that do not align with the taxpayer’s income. Keeping accurate books will ensure that the IRS can track where all funds originated and ended up, assuring them that no money was pocketed illegitimately, Rosalind Resnick, a CEO of a consulting firm for startups, notes in an article for Entrepreneur magazine.
“Writing off too many business-related expenses can put you in the IRS’ line of fire, especially if the income you report is relatively modest. An IRS computer program compares your deductions to others in the same income bracket (the so-called DIF Score) and selects the returns with the highest probability of generating additional audit revenue,” writes Resnick.
Entrepreneurs that claim a home office will also attract some extra attention. It is especially important to keep good records, document expenses the moment they are incurred and save receipts.
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