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Business Tax Tips: How to Prepare for and Handle a Tax Audit

Here are a few basic techniques to help you avoid a potentially painful audit from the IRS.

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3. Follow the rules.

You can legally avoid paying much less on your taxes, but I make an emphasis on “legally.” Stay within the bounds the IRS has set for write-offs, expenses and reporting and everyone will be better-off.

Become a Rapid Responder

If, after you’ve prepared and submitted your taxes to the government, you receive a letter asking for clarification, be sure to respond clearly, appropriately and within the time-frame indicated on any communication.

This will ensure the IRS knows you are awake, paying attention and are at least somewhat organized with your finances. It also makes you a bit less suspicious when it comes time to doll out audit memos.

In addition, rapid response also ensures you don’t pay the hefty interest penalties which are inherent in tax late notices. This alone is worth keeping track of and responding rapidly to any IRS badgering from Uncle Sam.

Don’t Make Too Much Money

When I crafted the title of this section, it nearly made me laugh out loud.

Nothing is more ridiculous than telling an entrepreneur to make as little as possible. Sadly, the reality of the situation is that the more you make, the more likely you are to end up as a blip on the radar.

The most successful entrepreneurs will not only need great internal and external CPAs and financial experts but they’ll also need to look for other ways to shelter assets for legal tax avoidance. This is a different topic, but it ties in nicely.

The more you report, the greater chance you have of being auditing.

The more you grow, the greater your need for expert controls both internal and external to your company. Because a small piece of the overall mission of most for-profit entities is to maximize profits and increase shareholder value, it probably goes without saying that any sane individual would not likely minimize profits just to avoid a tax audit.

Let the point be solidly made, however, that highly profitable companies are much more likely to be audited.

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