Can Your California Business Get Audited if You Lose Money?
If you are operating a business in California, the last news you want to receive is that your company is being audited by the Internal Revenue Service (IRS) or another agency. There are several misconceptions that business owners may have about the reason for a tax audit. Understanding the cause of an audit and your rights are important to respond to a tax audit adequately. If you require legal assistance because your business is being subjected to a tax audit, you should consult with an experienced Sacramento tax audit lawyer today. At the NewPoint Law Group, we are dedicated to providing you with the legal representation you need to manage your complex tax law issues. You do not have to be intimidated by a tax audit as there is likely a solution to your problem. The NewPoint Law Group is here to explain whether your California business can be audited for losing money.
Why the IRS May Audit a California Business for Losing Money
Undergoing a federal and state income tax audit can be a tedious process for a business owner. This especially true if the business owner is unsure of the reason for the tax audit. There are various myths regarding when a company can be audited. For example, some people may believe that their business could be audited if they report a loss of income. This is only a half-truth. A company that reports a loss of income will not automatically be audited by the IRS. However, if the company has operated at a loss every year and gained tax credits and other benefits, this could raise some red flags.
If the IRS receives several tax returns from a business that has never reported income, it will be subject to a tax audit. The IRS will perform an audit under these circumstances because they may not believe that you are actually running a business. Instead, the IRS may consider your activities as a hobby because you have no motive to earn a profit.
If the IRS labels a business as a hobby, they can begin removing the losses from your tax return for the current year and previous years. Additionally, if you earn income while operating at a loss, the IRS will prohibit your ability to claim itemized deductions. As a result, you may end up owing the IRS a substantial amount of money in taxes.
Fortunately, you may be able to dispute this tax bill with the IRS. Our firm understands the complexity of the tax code, and we can help you pursue a more desirable outcome for your tax audit.
To learn more about other common causes of tax audits in California, you should continue reading and speak with an experienced Sacramento tax attorney as soon as possible.
Common Causes of Tax Audits for California Businesses
A tax audit is a serious event for the owner of a business. Failing to have the answers to tax questions posed by the IRS could lead to a number of problems for a business owner. That is why it is essential to understand the many reasons that the IRS may conduct a tax audit on a California business. The following is a list of common causes of business tax audits that business owners should be aware of.
Earning Large Profits
It is estimated that over 50% of tax audits occur to companies that report income over the threshold of $1 million a year. If you are earning profits in excess of $1 million, it would be wise to work with an experienced tax attorney that can help you manage your returns. An experienced tax attorney can help you claim any tax credits or benefits that may be provided by the tax code.
Avoiding Mathematical Errors
There are various tax calculation programs available for consumers to purchase to streamline their tax returns. However, if you are filing a complex tax return and you are unsure about what provisions of the code apply to your business, you should consider working with a tax attorney. Our firm can help you get organized to decrease the possibility of sending a flawed tax return to the IRS.
Using a Home Office Deduction
If you designate a certain section of your home as an area where you will exclusively perform work related to your business, you can claim a home office deduction. The home office deduction allows a taxpayer to file a deduction on their taxes for the cost of using a portion of their home to work. However, the IRS is likely to challenge a taxpayer that claims a home office deduction. That is why it is important to ensure that you are not performing other non-work related activities in your home office.
There are other common causes of tax audits that are not discussed above. Our firm is ready to help you defend your business against an audit by the IRS.
Work with Our Experienced California Tax Audit Attorneys to Discuss Your Case
If you require legal assistance to handle a tax audit of your business, you should consult with an experienced California payroll tax audit attorney as soon as possible. The legal team at the NewPoint Law Group has a wide range of experience litigating complex tax cases, and we are ready to work with you. To schedule a confidential legal consultation to discuss your tax issues, contact the NewPoint Law Group at 1-800-358-0305. You can also contact the firm by using our online submission form.