Category: Tax Audits

Your Business is Being Audited, What’s Next?

You recently learned that your company is being audited. Not to worry! You can overcome it. It is important to first confirm that the audit is legitimate. The IRS emphasizes that audits are always started via mail. It’sCaution Sign - IRS Audit Ahead a scam if you receive a call or email.

Even if you’ve established that the audit is genuine, you haven’t broken any rules. When there are problems with your returns and the returns of other taxpayers whose returns were chosen for an audit, you may occasionally receive a “related examination.” Other times, your selection may be entirely arbitrary and based only on a statistical calculation.

How does an IRS audit work?

In order to review your records, the IRS will conduct your audit via mail or in-person interview. An IRS office (office audit) or your home, place of business, or the office of your accountant (field audit) may host the interview. Keep in mind that we will first contact you via letter. The letter you receive from the IRS will provide all necessary contact details as well as instructions.

The IRS may ask for particular papers. For a company, these can be personnel records like uniform guidelines or dress regulations, requirements for continuing education, W-2 reimbursement statements, and Schedule K-1. The IRS is willing to accept some electronic records generated by tax software in place of or in addition to other kinds of records. You will be informed of what is acceptable by the auditor.

You should be aware that the law requires you to maintain all the documents you used to draft your tax return for at least three years following the filing date. In an audit, the IRS generally states that it will take into account returns submitted during the last three years. However, it may add additional years, but never more than six, if it discovers a significant error.

What rights do you have in your audit?

The government might act in this manner. What you can anticipate is as follows:

IRS staff are treated with professionalism and courtesy.

Privacy and secrecy about tax matters.

having knowledge of the IRS’s requests for information, how they would use them, and the consequences of not providing them.

a self- or authorized representative making a representation.

the ability to challenge disputes in front of the IRS and in court.

What’s the audit’s outcome?

One of three things can happen to end an audit:

The same: You supported every aspect of the review, but nothing changed as a result.

Agreed: You are aware of and accept the adjustments proposed by the IRS.

Disagreed: You acknowledge that the IRS has proposed modifications, but you don’t agree with them.

Working closely with a certified tax professional is your best option from the minute you receive the notice until the issue is finally resolved. The audit will proceed as fast and smoothly as possible if you do this.

Understand and File Your Business’s Schedules K-2 and K-3 Easily

K2 scheduleIn compliance with IRS guidelines, certain businesses with international financial activities are required to submit Schedule K-2 and Schedule K-3 forms. These vital documents pertain to a partner’s distributive share of international items and their overall share of income, deductions, credits, and more. Specifically, taxpayers filing Forms 1065, 1120-S, or 8865 must meticulously complete these supplementary worksheets to remain in good standing.

Say goodbye to outdated tax documentation and embrace the revolutionary Schedules K-2 and K-3! Launched for the 2021 tax season, these new schedules not only streamline the filing process for domestic partnerships and foreign tax credit claims, but also ensure a more organized and efficient approach.

However, beware the consequences of non-compliance!

Falling afoul of these new schedules may invoke penalties as per Internal Revenue Code Sections 6698, 6721, and 6722. Even domestic partnerships with exclusively domestic income and assets should pay heed, especially if partners plan to claim the foreign tax credit. Stay updated and compliant for smooth sailing in tax season!

The introduction of Schedules K-2 and K-3 has transformed the landscape of tax reporting by moving crucial data originally included in Schedules K and K-1. These new schedules focus on items of additional tax relevance; however, a precise and comprehensible interpretation of this concept is yet to be clarified, raising intrigue and questions in the professional sphere.

Discover the key insights from Schedules K-2 and K-3 that highlight their international significance – originally part of Schedules K and K-1. These elements include vital information on foreign tax credits, income particulars of foreign partners operating in the US, and critical data on various international taxes like base erosion and anti-abuse, foreign-derived intangible income tax, and global intangible low-taxed income tax. Stay informed about the transitional relief offered by IRS Notice 2021-39 for those proactively striving to comply with the updated regulations.

The IRS has recently revamped its systems, streamlined processes, and clarified procedures to ensure a more efficient approach to gathering crucial information. Amendments have been implemented in partnership agreements and other regulations to simplify the collection of data. Furthermore, the IRS firmly underscores the significance of incorporating information from Schedules K-2 and K-3 into all white paper statements, including the footnotes for Schedule K-1.

Tackling Schedule K-2 or K-3 can be a challenging endeavor due to the intricate knowledge of global tax principles involved. It’s essential for entities to seek guidance from their trusted tax adviser when navigating the complexities of these crucial forms.

Differences between Schedule K-2 and Schedule K-3

Stay ahead in the game by keeping these four crucial aspects in check:

  1. Navigate through the maze of 19 pages and 11 individual sections of Schedule K-2, and take on the 12-part challenge in Schedule K-3. Master the art of completing intricate tables and worksheets for a seamless international activity reporting experience.
  2. Firmly establish your partners’ identities and ensure flawless documentation using the powerful duo, Form W-8 or W-9, to avoid any hiccups along the way.
  3. Embrace change by identifying the gaps between your current reporting methods and the cutting-edge requirements of Schedules K-2 and K-3, ensuring a smooth transition and up-to-date compliance.
  4. Time is of the essence! Beat the clock by allowing ample time to gather proof of essential information, avoiding any last-minute scrambles or complications.

In the end, Schedules K-2 and K-3 will bring a new level of transparency for shareholders and partners, streamlining the process of determining their overall U.S. income tax obligations alongside international income and relevant deductions.

How Often Are Small Businesses Audited?

Caution Sign - IRS Audit AheadSmall businesses can be subject to audits randomly, but the IRS usually pays closer attention when specific red flags appear. Unfortunately, many owners don’t know these audit triggers and may struggle with preventing them. To provide guidance for entrepreneurs we’re breaking down how often small businesses are audited and what alerts the IRS – helping business owners stay prepared in any circumstance.

Common IRS Red Flags

Be Wary of Entertainment Spending

Though there are still deductions available for meals with potential or current clients, care should be taken when claiming other entertainment expenses. As the government eliminated business-related deduction allowances in 2017, all costs associated with such activities will have to come out of pocket. However, if you are present at a client meal and order reasonably priced food and beverages – 50% may potentially qualify as deductible. It’s wise to tread carefully when it comes to leisure events involving your business contacts lest an audit ensues!

Be Careful with Deductions

Business owners invest a substantial amount of time and effort into their companies to ensure success, so they should certainly take advantage of all applicable deductions. However, when it comes to accessing these benefits, caution is key. The IRS employs Discriminate Income Function screening – if your business makes significantly more deductions than those in the same industry typically do, you may be subject to an inquiry from the agency itself!

It’s easy to become tempted by the potential savings when it comes to miscellaneous deductions. But be warned that careless decision-making in this area could come with serious IRS consequences! To stay on the safe side, always make sure your business expenses are ordinary and necessary for your industry—particularly vehicle mileage or travel related costs which often face extra scrutiny from tax authorities. If you’re new to managing a small organization, expert financial advice is indispensable – don’t hesitate to seek out help so you can get off on the right foot as far as taxes go.

Always File on Time

The IRS is always keeping an eye out for any inconsistencies that could indicate a potential issue with your business taxes. Don’t take the risk of their unwanted scrutiny and ensure you file on time – whether electronically or via paper! To avoid exception, start filing now to guarantee timely compliance and prevent those costly penalty fees. If delays occur unexpectedly, be sure to request an extension before it’s too late and keep electronic filing in mind as it reduces errors significantly.

Consider Incorporating

With increased accountability and professional competence, small businesses that incorporate often find themselves less likely to be audited by the IRS than Schedule C income tax filers who are self-employed. According to one reliable legal source, this is because incorporation can demonstrate a higher level of financial responsibility which helps reduce suspicion for underreported incomes or unearned deductions – an issue frequently associated with smaller operations.

Financially savvy business owners and entrepreneurs are turning to corporations or LLCs for multiple advantages. Aside from reducing the risk of audit, incorporation delivers substantial tax benefits and safeguards personal assets while enhancing eligibility for loans. Incorporating is an ideal strategy if you value financial security – so why wait?

Be Cautious of Sudden Charity

Donating to charity is a great way of giving back, but if you give too much at once the IRS may become suspicious. Gradual donations spread over time are more likely to be taken as genuine support rather than tax evasion strategies–plus it gives your charitable cause benefits that last!

If Paying in Cash, Record Every Transaction in Detail

Companies engaging in cash transactions, such as purchasing large items like vehicles and equipment, should keep careful records to ensure they are up-to-date. Consider using a business credit or debit card instead for easier record keeping – not only can you track your expenses more accurately, but it could save time during the filing process if ever required by authorities.

Always Report ALL Taxable Income

Keeping accurate records of income is a key component to any successful business, and the IRS has high expectations when it comes time to file taxes. Make sure each taxable dollar earned in the US during tax season is properly reported; not doing so can easily lead to an audit should suspicion arise. Furthermore, businesses utilizing digital currency may be subject to even more intense scrutiny by government agencies – think carefully before incorporating such into your operations!

Provide Reasonable Salaries

As a small business owner, maintaining reasonable employee salaries is key. The IRS pays particular attention to overly large remuneration for shareholders and executives alike; accordingly, with enlarged incomes comes amplified audit risk – something that must be taken into careful consideration when navigating salary decisions.

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At UptoDate Bookkeeping, we are dedicated to equipping small businesses with the tools they need for success. Our team of experienced professionals use their knowledge and skill to provide tailored solutions that guarantee accurate records and balanced accounts every time. Get started on your business growth journey today by scheduling a call or chat session with one of our bookkeeping experts!