IRS Will Audit More Small Businesses this Year

March, 28 2021

Yes, it’s true. The IRS plans to increase its audits of smaller businesses and their investors. And yes, the audits come on top of a year of pandemic-related tax changes. My advice: instead of panicking, put a solid plan in place to eliminate mistakes and be prepared for a review.

Who is targeted?

The expected surge in audits will focus on small businesses including mom-and-pop retailers, online start-ups, and investment funds. Pass-through entities, including partnerships, limited liability companies, sole-proprietorships, and S corporations, will also be targeted.

Prepare and strategize

Here are a few tips to help safeguard your business interests and avoid an audit:

  • Keep clear records: Accurately and honestly reporting all income, deductions, credits, expenses, and more can help keep an audit at bay. Make sure you have adequate documentation to support the figures reported on your business’ information return.
  • Mind your deductions: Unusual itemized deductions raise red flags. Reporting losses for three years or more could increase your risk of an examination into whether you’re actually in business.
  • Make your estimated tax payments: Failing to make these payments raises your risk of an audit and/or penalties.
  • Go digital: Today’s bookkeeping software keeps your records accurate and secure, which helps your CPA electronically prepare and file your tax returns. This is the best method to prevent filing flawed returns.
  • Know the rules for partnerships: If your small business is a partnership, know if it is subject to the Centralized Partnership Audit Regime.

And then there’s COVID-19

Last year brought a multitude of tax changes for small businesses, including the Families First Coronavirus Response Act, the Cares Act, and the government funding bill passed in December. Many of the changes overlap. Because of this, navigating the U.S. tax code will be more challenging in 2021.

The bottom line: I admit, it’s hard not to feel a little queasy. But please don’t panic. It’s time to get all your ducks in a row. With proper planning and help from your accounting professional, you can avoid audit risks and get back to running your business. I hope this post inspires you to get your tax records in order and meet with your accounting professional as soon as you can.

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Additional sources:

IRS Expected to Audit More Small Businesses in 2021

The IRS Plans to Audit More Small Businesses This Year