What can trigger a tax investigation into your business?
The idea of your business being subjected to a tax investigation isn’t pleasant. The thing is, as your business grows and becomes more successful, you are more likely to hear from the IRS that you are being audited.
So what can trigger such a tax investigation? There are actually a few different factors and knowing them will help you prepare should the IRS of HMRC come knocking.
Business growth and expansion
It’s important to note that it is possible for a business to be selected at random for a tax audit or investigation. However, this is usually the case for larger companies in order to ensure they are paying their fair share.
When it comes to smaller businesses, it’s more common to be subjected to an audit if your company undergoes a sudden and strong period of growth. This sudden change in company’s size, and the scale of business it conducts, can simply trigger an audit for clarification.
Of course sudden growth in just about any business is a great thing. Just remember that any big changes like that can trigger some sort of inquiry, investigation or audit.
Large year-on-year financial change
If a company sees a significant change in its finances, either upward OR downward, it can appear suspicious to government regulators. If the change has seemingly happened without good cause, this could trigger an investigation.
An example might be if you have spent heavily on one particular area of your business, but have not done so in previous years. An example would be the purchase of new equipment in one year that you have not made in past years.
For this reason, it’s important to make sure you keep accurate records for your business and expenditures.
Tax mistakes and inconsistencies
Another key area that can trigger an investigation is when mistakes or inconsistencies are found in your tax returns. While mistakes do happen, frequent inaccuracies can cause an investigation for a clearer picture of the company and its finances. To avoid this, make sure your returns are accurate and consistent.
Being prepared for a tax investigation
It is really safe to assume that a tax audit or investigation can happen to any business as it grows and develops. It is important that you are always prepared with your finances in order. Do this by keeping your accounts and tax information up to date, filed and in order.
If you do find yourself needing help, it can be a good idea to speak to a business association for support. The Federation of Small Businesses (FSB), for instance, provides its FSB Tax Investigation Advice service. Services like these can help business managers build key knowledge and expertise, so they know how to best manage their company finances.
With the right knowledge, preparation and approach to your taxes, you can make sure all your business spending, dealings and developments are accounted for, correct and consistent. Then you can focus on what really matters – running your business.