Opinion: Focus on Fundamentals to Protect Your Small Business from IRS Scrutingy

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Sign outside IRS headquarters in Washington. Photo via Wikimedia Commons

By Kevan McLaughlin

Many companies started off 2018 trying to figure out how the new tax law will benefit their organization. My answer is simple — it won’t if you don’t take care of the fundamentals.

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The fact remains that more businesses possess a higher risk for an Internal Revenue Service audit from not focusing on proper accounting practices than they do in receiving any windfall from Congress’ most recent legislative achievement.

One growing “red flag” relates to the reporting of credit card transactions. For example, the IRS can use that reported data to compare merchant transactions with overall income, and then again with industry averages, to identify possible under-reporting of income. Accounts that are registered in an executive’s name, but not the organization’s, can also gain the Fed’s attention.

Tax authorities, particularly the IRS, spend a great deal of time tracking down these type of accounting irregularities. We expect this trend to continue as businesses expand their use of automated credit card payment to manage expenses.

Kevan McLaughlin

Though the percentage of tax returns audited hovers at only one percent, small businesses make up a disproportionate amount of those inquiries. That’s because the IRS believes that more of them do not conduct prudent accepted accounting principles, and understandably so.

Don’t give tax authorities a chance to train their sights on your organization by investing in good bookkeeping practices. Several reasonably priced outsource options exist, but for companies that want to do it in-house, ensure to incorporate the following:

  • Keep the company bank ledger up to date. Do so at least weekly and record all entries accurately.
  • Keep tabs on all credit card transactions. Ensure each expense gets correctly categorized and annotated for what it covered and why. Incorporate them into your ledger.
  • Keep copies of all bank and credit card statements. Reconcile them against your ledger as well.
  • Accurately pay your bills in a timely fashion, especially employee payroll taxes.

If you discover irregularities, address them right away. Don’t wait for the IRS to uncover it. The longer a tax controversy goes neglected, or the more these activities fester, the more unfavorable the outcome will ultimately be.

In most cases, the best option means typically hiring an outside bookkeeping service. While an additional expense, businesses must view this similarly to obtaining insurance. That ounce of prudent prevention will translate to a pound of cure if the IRS or other tax agency comes calling.


As the founder of McLaughlin Legal, San Diego tax attorney Kevan P. McLaughlin focuses his practice on all aspects of federal and California tax law, with a particular emphasis on representing taxpayers in civil and criminal tax litigation and controversy cases.

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