Tips for Businesses to Avoid an IRS Sales Tax Audit

An IRS sales tax audit can be very upsetting, but there are a few ways to keep your audit risk low. It’s important to have clarity on red flags that act like honey attracting IRS auditors to your business.

Understand the Sales Tax Nexus

Do you do business in more than one state? Depending on that state’s sales tax nexus, you may have to pay taxes there.

The tax nexus is typically based on your yearly gross receipts in a specific state. Each state has its nexus. Ensure you know the rules so you don’t run afoul of any laws.

Don’t Report a Loss Every Single Year

It’s fine to report losses on your tax return now and then, but if you do this every year, you’re at high risk for an IRS sales tax audit. The IRS pays extra attention to businesses that claim losses in two out of five tax years.

Comply with All IRS Notices

Has the IRS or a state agency sent you a notice in the mail? Whatever you do, don’t crumple it up and toss it in the wastebasket. You might have to pay penalties and fines if you do. 

Keep Good Records

It’s tempting not to bother keeping good records because doing so takes time that your busy company doesn’t have. But failing to keep proper records is a one-way ticket to trouble with the IRS. Be sure to keep all of your accounting books, receipts, bills, and other records in case the IRS wants to take a look at them.

Ensure the Numbers Add Up

One of the biggest reasons for an audit is discrepancies between the IRS’s information and yours. If you enter the wrong information and make a mistake, the IRS is likely to send you a letter saying that you owe them some money.

If, on the other hand, your tax return is full of “mistakes,” expect the IRS to come knocking so they can figure out what’s going on.

Find Out Whether Your Customers or Clients Have Been Audited

When the IRS audits one business, they tend to go down the rabbit hole and hunt down other related businesses that might be up to no good. That’s why keeping tabs on your clients and customers is smart. If the IRS has sent them an audit notice, odds are good that you might find an IRS sales tax audit notice in the mail, too.

Avoid Misclassifying Employees as Independent Contractors

Misclassifying employees as independent contractors is a mistake that many business owners make. The IRS watches out for this, and if caught, you’ll have to pay back the payroll tax you should’ve paid in the first place.

You can classify a worker as a contractor if:

• You, as the employer, do not have control over how the individual performs their work
• The worker controls aspects of their own business, such as buying tools and paying their own employees
• The worker performs a short-term, specialized function

We’ll Help You Avoid an IRS Sales Tax Audit

Did you find an IRS sales tax audit notice in the mail and wonder what it means for your business? If you’re worried about what to expect during the audit process, give Levy & Associates a call now at (800) TAX-LEVY.