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6 Red Flags That Can Signal An Audit

  • Posted: 10/15/2019
  • By: Admin

The one thing that most likely scares you more than your business failing is the thought of the IRS coming after you for an audit on your business taxes. Though you are more likely to receive an audit as an individual or large corporation than as a small business, and even though audits are decreasing your business can still be at risk. Small businesses are starting to become looked at more by the IRS, where years ago the small business was essentially almost untouched. There is no sure way to avoid getting an audit, but having an accurate accounting system and giving extra care to the following triggers can better protect you from having an audit.

1.) Your Claim A Home Office Deduction
Many tax payers who use the home office deduction do not fully understand the rules in receiving this deduction, so the IRS looks extra carefully at those who do use this. The rules for claiming this deduction are very strict as the line can be blurred with it being a personal deduction or a business depending on if your home office meets all of the qualifications. You will need to prove to the IRS that your deduction claim is valid, so it is best that you meet and speak with a tax professional, such as your accountant, to make sure your home office will meet all of the requirements.

2.) Your Business is a Cash Business
Business that will take in large amounts of cash transactions such as hair salons, restaurants, bars, car washes, tax services, and a number of other business types you may be more likely to receive an audit compared to business types that take in more electronic payments. The IRS closely monitors these types of businesses, as it is much easier for owners to not be honest about reporting the exact income form the business. This is of course the rarity in business owners, as a majority of small business owners report all of their income, the few who like to cheat ruin for everyone else. The IRS will closely monitor your business and your personal expenses to ensure your lifestyle is aligning with the amount of income you reported. They will also look into other cash transactions such as if you purchase a vehicle completely with cash, that can signal a red flag for them to look further into your income and business.

3.) Excessive Business Vehicle Use
Depending on your business, you may need to use a vehicle for your business. However, if you claim on your taxes 100 percent of the vehicle use for business then you can be sure that the IRS will be taking an extra long look at your return. You must provide documentation and other evidence to prove that the vehicle was used solely for business purposes, you must also only choose between the actual expenses or the IRS standard mileage rate when claiming your deduction, as filing under both will send a major red flag to the IRS to investigate your return further. To help make sure you keep track of mileage, dates, meetings, and other important information. Remember you can claim business vehicle expenses you can claim traveling to meet with clients, conducting research, posting mail for the business, or other business-related activities. You cannot claim going to your local Dunkin Donuts or any other usage dealing with personal errands.

4.) Mistakes Made
We all make mistakes on things, after all we are all only human. However, making mistakes in your financial statements, your business taxes, or other financial information can trigger the IRS to take a deeper look into all of your books and tax return. Whether it was a human error or you did not fully understand the tax or bookkeeping requirements, the IRS will be looking into your return, especially if the error shows you are underreporting income. To help keep your business from having an audit based on making simple mathematical or bookkeeping errors, it is best to have a professional accounting firm, as they will be able to accurately manage your company’s bookkeeping and financial statements, as well as being able to accurately complete your tax return.

5.) You Exceed the 3% Limit of Adjusted Gross Income on Charitable Donations
Depending on your business, you may need to use a vehicle for your business. However, if you claim on your taxes 100 percent of the vehicle use for business then you can be sure that the IRS will be taking an extra long look at your return. You must provide documentation and other evidence to prove that the vehicle was used solely for business purposes, you must also only choose between the actual expenses or the IRS standard mileage rate when claiming your deduction, as filing under both will send a major red flag to the IRS to investigate your return further. To help make sure you keep track of mileage, dates, meetings, and other important information. Remember you can claim business vehicle expenses you can claim traveling to meet with clients, conducting research, posting mail for the business, or other business-related activities. You cannot claim going to your local Dunkin Donuts or any other usage dealing with personal errands.

6.) Filing as a Schedule C
Now this is not to scare you from wanting to be a sole proprietor, however, because as a sole proprietor yourself and your business are one entity and have one tax return, your tax return will be looked at a lot more closely compared to a business that is an S corp. On a schedule C or 140 form, you will calculate all of your deductions such as home office, advertising expenses, interest, and any other deduction you are legally allowed to claim. As a sole proprietor you should not be afraid to claim any decoctions in fear of receiving an audit, though it is advised that you should be careful which deductions you choose so you do not alert the IRS. The best way to help you from raising eyebrows from the IRS is to have a professional accounting firm work on your tax return so your tax return contains all of the deductions your business is eligible to claim.

Unfortunately, there is no guarantee that your business will never receive an audit, but there are a number of ways to prevent signaling to the IRS that your business should be looked into. Having a professional accounting firm is the best way to keep your business from raising any alerts to the IRS. Not only will not have to worry about your books either being inaccurate or not up-to-date, but your tax return will be filed accurately and on-time to help better protect your business from sending red flags to the IRS.



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