U.S. tax system is based on self-reporting tax measures. When starting a business, you need to apply for various tax identification numbers and licenses to City, County, State and Federal governments. Due dates for tax returns are all varied by the type of taxes. Although you keep all due dates and report and pay full tax liabilities, you may be “audited” by government agencies. Random selection for government audit is what they say, but in reality when there is any questionable item, you may be selected for audit.
Now let’s introduce you to the common issues arisen by various government agencies during an audit.
- City License: You are required to apply for a business tax certificate or business license at or before the start of business and renew every year by reporting the measurement of tax basis, usually total sales or number of employees, for yearly renewal fee (tax). Under-reporting of measurement of tax basis is the major concern for city agencies when auditing your business.
- Payroll Tax: You are to withhold employee portion of payroll tax and pay them along your employer portion. The common issue involving payroll tax audit is misclassification of employees as independent contractors to save employer portion of payroll tax.
- Sales Tax: Sales taxes are to be collected from customers on behalf of state governments and submitted by due dates. There is an extensive set of rules to follow to classify products from taxable to non-taxable. Possible concerns from sales tax audit are at whether or not correct total sales has been reported and whether taxable sales were inappropriately reported as non-taxable sales resulting in under submitting of sales tax collected from customers.
- Business Property Tax: Business purchase equipments and furniture and make improvements when both start and/or during operation. These capital assets are listed on financial statements and depreciated over the life of assets. They are also reported to County and County Assessors decides the value of property and impose taxes. Therefore, County auditors try to find whether all capital assets owned by an entity has been reported and whether the entity has classified acquisition of capital assets as expense so it may reduce property tax liability.
- Income Tax: Total income less total expense is total net income reportable to both Federal and State government. Total expense is what I.R.S. and State auditors concern. People tend to acknowledge that actual withdrawal/distribution plus any wage received are their income on which tax should be imposed. But the questions arise regarding personal expenditures expensed as business expenditures. Possible overstatement of business expense, which cannot be substantiated by proofs, will be recaptured as income. Thus, maintaining adequate documents is es