Tax audit is a stressful event for most business owners. Even if you think you’re doing everything right, it can sometimes get intimidating.
The key, experts say, is to accurately disclose revenues, deductions and losses that you intend to claim. If you fail to do so, it can cause severe damage to your business, including liens and closure.
In this article, we’ll walk you through tax audits and how you can reduce your odds of being audited.
How to reduce chances of a tax audit
Small business owners have additional tax responsibilities above and beyond those of conventional employees. With different forms and numerous potential deductions, it can be easy to overlook minor details or miscalculate.
While there’s no way to protect yourself from the dreaded tax audit completely, you can reduce your odds of being audited.
Here are nine best practices to follow to minimise your chances of undergoing an audit.
1. Quote exact numbers and refrain from roundings
Small businesses make a common mistake while handling their tax returns. They round numbers for ease of calculation. This leads to minute inconsistencies, which, in turn, cause significant calculation errors. Calculation errors will draw attention from the Income Tax (IT) department.
2. File taxes on time
Always file your taxes on time, even if that means you have to start the process at the beginning of the year (January). In addition to a penalty fee, filing your taxes late can trigger unwanted attention from the IT department.
3. Familiarise yourself with average salaries in your line of work
Small business owners who offer business shares to employees have to be careful about providing reasonable salaries. High earners, who are also shareholders, invite interest from the IT department as this is seen as a deceitful way to lower taxes by undercutting profits.
4. Don’t report losses year-over-year
You may undergo a tax audit if you report losses in more than two out of five years. Authorities may think that your business is a hobby and disallow all your business expense deductions.
5. Double-check your social security numbers
Ensure that you enter the correct Aadhaar and PAN numbers and then double-check. Entering the wrong social security numbers while filing your taxes can be an audit flag.
6. Know the rules of home-office deductions
Be updated with home office tax rebate rules. The IT department will determine whether you follow the “regular and exclusive” laws for your home office. The rule is to use your office space for business only. You or your family members can’t do anything else there, and it should be clear of personal effects.
7. Opt for a corporate credit card
A corporate credit card is an excellent tool for dealing with business expenses. With a corporate card, you can segregate your personal and business expenditure. This is important because only business-related expenses get a tax rebate. Also, you can track all your business expenditures without relying on employees to submit the report of expenses. While filing tax returns, you can submit the same financial records. This way, you can track all expenses and reduce the chance of a tax audit.
8. Hire a professional
Laws related to finance and taxation are pretty complicated and cluttered. For small businesses, it is advisable to get professional help from a CA or a tax expert to help you with audit flags.
9. Watch out for startup tax deductions
Governments worldwide run various incubation programs to help startups. For instance, Prime Minister Narendra Modi initiated the Startup India campaign in 2016 to boost entrepreneurship in India. One of the major highlights of such incubation programs is tax rebates. As an SMB, you should always keep yourself aware of any such opportunity to reduce tax liability.
There you have it—a guide for small businesses to sail through tax audits. No matter how your audit turns out, use it as an opportunity to determine what’s working in your organisation and what isn’t. It’s also the perfect time to consider how you want to manage your tax obligations in the future.
Meanwhile, you can get a RazorpayX Corporate Card for your business to eliminate the chances of a tax audit. It offers great flexibility, dynamic credit limits, auto-repayment features and much more!