10 Small Business Tax Audit Triggers and How to Deal with the IRS?
Small business audit triggers are certain activities or events that could trigger a tax audit. It’s important to be aware of these triggers so you can take steps to avoid being singled out for an audit and keep your taxes in order. Some common small business audit triggers include:
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Failing To Report All Income
If you fail to report all of your income, it’s possible the IRS will flag it as suspicious and conduct an audit. Make sure you keep detailed records of all sources of income and report them accurately on your tax returns.
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Claiming Certain Deductions
Certain deductions are often red flags for the IRS and will increase the chances of having an audit conducted on your return. Be sure you understand what types of deductions are allowed and make sure your documentation is complete and accurate.
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Self-Employed Individuals
If you’re self-employed, the IRS will typically be more likely to audit you because of the increased possibility of errors or attempts to avoid paying taxes. Ensure your business is properly registered, keep detailed records of all income and expenses, and accurately report them on your tax returns.
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High Net Worth Taxpayers
People with a high net worth are also more likely to be targeted for an audit since there’s more potential for tax avoidance or evasion. Make sure all income sources are reported accurately, keep excellent records of all investments, and make sure that required forms are filed in a timely manner.
By understanding small business audit triggers and taking steps to avoid them, you can help ensure that your taxes are up-to-date and accurate. By proactively avoiding potential audit triggers, you can help prevent the need for an audit in the future.
It is best to consult with a tax professional or CPA who can advise you on any specific issues related to your business. They will also be able to help prepare your tax returns so they comply with all regulations and minimize your chance of being audited by the IRS.
Keeping detailed records and filing accurate returns are key components of reducing your chances of an audit. Taking these proactive steps now can save you from problems down the road.
10 Small Business Audit Triggers and What To Do If the IRS Comes Calling
1. Changes In The Business Structure
If your business has changed its structure, it could trigger an audit. For example, if you’ve recently converted from a sole proprietorship to an LLC or corporation, the IRS may decide to take a closer look at your financials. If this happens, it’s important to be prepared with accurate and up-to-date records of all transactions related to the change in structure.
2. Unexpected Increases In Income
Sudden jumps in income can also be a red flag for the IRS so it’s important to report these accurately on your taxes. Be prepared to provide additional documentation and evidence that explains where the additional funds came from and how they were spent.
3. Suspicious Deductions
Claiming deductions that are considered to be too high or suspicious in nature can also get the attention of the IRS. For example, if you claim a deduction for excessive business travel expenses or meals and entertainment, it could raise some eyebrows. To be safe, make sure you have documents and receipts to back up all of your deductions.
4. High Employee Wages
If you’re paying employees higher-than-normal wages compared to other businesses in your industry, the IRS may take notice and decide to audit your company. Be prepared with accurate information about the salaries or wages you pay your employees so that you can prove they are reasonable and necessary for running your business.
5. Large Charitable Contributions
While giving back to the community is always a good thing, it can also be an audit flag. If you’ve made large contributions to charitable organizations, make sure you have all of the necessary paperwork and records to prove that the donation was legitimate.
6. Home Office Deductions
Claiming home office deductions can be tricky because it requires accurate record keeping in order to qualify for them. Make sure you have documents that track your expenses related to setting up and running a home office such as utility bills, internet fees, supplies, etc.
7. Multiple Companies
If you own more than one business or multiple companies under the same umbrella organization it could trigger an audit if any of these entities are not reporting income correctly. It’s important to have accurate and up-to-date financial information for each entity so that you can prove to the IRS that all income is being reported accurately.
8. Self-Employment Taxes
If you’re self-employed, it’s important to make sure you are paying your taxes on time and in full. The IRS keeps a close eye on self-employment taxes because they are one of the largest sources of revenue for the government. Make sure you keep accurate records of all income and expenses related to your business so that you can show proof of timely payment if needed.
9. Unusual Activity
If something looks out of the ordinary or too good to be true, it may trigger an audit from the IRS. This could include claiming large losses, not reporting income from certain sources, or claiming deductions that don’t seem to make sense. It’s important to be able to provide records and documents that support all of your claims in order to avoid any issues with the IRS.
10. Activity Outside The Business Scope
If you’re operating outside of your business’s scope or purpose, it could raise some red flags and potentially put you at risk for an audit. Make sure you document any activity related to your business so that you can prove why it was necessary if needed. Additionally, keep up-to-date records and financial information so that you can easily demonstrate compliance with the IRS if they come calling.
Conclusion
A good way to prepare for an audit is to keep accurate and up-to-date records for all of your business activities. Doing so will ensure that you are prepared if the IRS does decide to investigate, giving you the best chance at being able to explain yourself and avoid any penalties. It’s always better to be safe than sorry when it comes to dealing with the IRS!
