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Everyone should do their upmost to prevent an audit on their taxes, but you should always be prepared for an audit. The best way to increase your chances of coming out of audit unscathed is to keep excellent records. The IRS will not take your word as proof of anything, so it pays to have as much documentation to back up your taxes as possible.
If you are not doing so already, set up a filing system and update it consistently. You can purchase online tracking systems and other software, but a simple spreadsheet is all you really need for your bookkeeping. This will help you get organized and give you a clear picture of where you stand financially. Here are a few tips to help you maintain a good bookkeeping system.
Receipts - If you don't have a receipt, don't claim the deduction. If you can't find a receipt, try to obtain a copy from the company who sold you the item. Credit card statements are dubious proof because many don't itemize what you bought.
Your business return is a report to the IRS and to your State Department of Revenue. It says a lot about your business and about you. But it also says one really important thing of which you might not be aware. Your business return says whether you should be audited or not.
Here's a brief outline of eight mistakes that you want to avoid on your business return by Diane Kennedy CPA:
Mistake #1: Selecting the wrong business type for your business.
There are some basic rules when it comes to selecting the right business type for your business. Don't put appreciating assets inside a corporation. There are a few (very few) instances where you might need to use a corporation to hold assets like real estate, but for the most part - don't do it!
Think about the tax election for your LLC. If you go with the basic default of Sole Proprietorship (single member) or Partnership (multi-members) you might not get what you want. Definitely get good tax advice before you make important elections with your tax return.
There are many ways to reduce your chances of being audited by the IRS. As we've discussed in previous articles, the IRS has red flags for certain industries and tax filing behavior. Unfortunately, real estate investors and business owners stand a far greater chance of being audited than their salaried counterparts. In this article we will look at some tips on how you can avoid these red flags:
• Try not to use whole numbers on your return such as $15,000. This can look suspicious and raise a red flag. Always file the exact amount spent.
• Avoid using a Schedule C for your business. This is a huge red flag because business owners can hide income and claim personal expenses as business expenses. If you file as a partnership or S corporation, you will reduce your chances of being audited considerably. Partnership tax returns are the least audited type of tax return. LLCs are usually taxed as partnerships and are a great option as they also offer limited liability and flow-through taxation.
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Our Free Assessment allows you to find out just how much you could have saved over the years, and how much you could save in the future. Assessments can find missed deductions, potential audit triggers and identify compliance and asset protection risk.
For those about to file taxes, we offer a free consultation. Learn how you can legally reduce the amount you pay out, personally, or maximize the financial efficiency of your business as a whole. We also advise on business formation and business restructuring.
At the Wealth Building CPA we teach our students how to become savvy and wealthy investors without making costly mistakes. Our many articles, webinars and podcasts demonstrate how to use money and tax strategies to maximize profits and minimize losses. This aggressive approach will fast track you to financial success. We implement a lot of the teachings from renowned real estate and wealth building experts such as: Robert Kiyosaki, Robert Allen, Scott Scheel, Ron Legrand, Zig Ziglar, Carleton Sheets, David Lindahl, Robert Shemin, Dave Ramsey and many more.
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