Nevada tax audit: New tips to help ensure success
Small business tax audits have been discussed previously in this blog, but one expert is offering new tips for successfully navigating an audit. Nevada business owners may be fearful of receiving a letter about a tax audit, but taking the right steps can diminish those fears and help them get through it relatively unscathed.
One of the first steps is to understand how the IRS selects businesses for audits. The IRS applies something called a DIF score to business’ tax returns. This score is based on perceived irregularities found in the business’ tax documents. A high score means that there is a higher likelihood of being selected for an audit. Certain factors such as claiming deductions higher than a reported income may increase the score and the odds for an audit.
One of the major issues that continually surfaces during an audit is whether the activity is a hobby. When a business activity is not done for profit, deductions on tax returns can be limited. If business owners wish to claim unprofitable activity on their tax returns, they may need to prove that they mounted an advertising campaign, completed a marketing plan and enjoyed prior success at the endeavor. The owner may also need to show that certain factors have affected their profitability and that the loss is temporary.
Another tip is to be creative in how one substantiates their deduction. Sometimes, documents may be lost that could prove certain expenses on the return. However, that does not mean that it is entirely a lost cause. The IRS does allow third-party documentation and oral testimony that could verify the expenses. Also, if receipt or other documentation is lost, owners can retrieve copies of their bank records or credit card statements to help prove their expenses.
Nevada business owners who are facing a tax audit may be nervous, but an audit can be simple if they follow certain rules. If they are overwhelmed by the possibility of an audit, it is always possible to seek out assistance. Such assistance could help them navigate the process of the audit and complete the proceedings with a positive result.
Source: Fox Business, “Four Ways to Beat Small-Business Tax Audit,” Kemberley Washington, Nov. 28, 2012