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6 red flags that may cause the IRS to audit your business

Writer's picture: Galt AccountingGalt Accounting

Updated: Mar 19, 2019

The IRS uses a mix of both automated and human processes when deciding which tax returns to audit. Every tax return your business returns are then compared with statistical norms, and those with anomalies undergo three layers of review.

Audits can then either occur by mail or in meetings at the physical location of the business. Sometimes, audits are unpleasant and usually want to be avoided. Specific red flags may draw the eye of the IRS. Today we will go over a few.


1. Not reporting all of your income As simple as it seems not reporting all of your income is one of the easiest red flags to commit. For example, Old brokerage accounts are commonly overlooked, as are Form 1099s and distributions from a college savings account to pay tuition. With how many different streams of income a business owner may have it could be difficult to keep all of them in mind when filling out a tax form.


2. 100% use of your vehicle for business

It's extremely rare to use a vehicle you own exclusively for business purposes, and the IRS is aware of this. Even if you own a car primarily for business purposes, it's likely that you'll occasionally use it for other purposes outside of business like taking your kid to that piano recital or a vacation.

For this reason, claiming that you use a vehicle for business purposes 100% of the time can be an audit trigger.


3. Business deductions that don’t make sense

Business owners who prepare their own statement should be cautious of accidental duplication of employee and business expenses, and of taking losses on activities that could appear to the IRS to be due to a hobby rather than a business activity.

Business owners need to know the difference between "unreimbursed employee expenses" and "business expenses,". The two are reported in two different places on your tax return. If there's apparent duplication, it could catch the IRS's attention. For example, if you claim a $1,000 unreimbursed employee expense for travel expenses and a business travel deduction for the exact same amount, it could raise some eyebrows at the IRS.

The latter part of the first paragraph is in reference to the IRS's distinction between a business (which needs to have a reasonable expectation of profit) and a hobby. Hobby expenses aren't deductible, while business expenses are, so if your business looks like a hobby on paper, the IRS may ask some questions.


4. Owning a cash business

It’s much easier for a business that deals in cash — restaurants, bars, convenience stores, hair salons, etc. —to misreport income due to not accurately keeping track of what’s being received. If audited, without proper bookkeeping, can result in additional fees that must be paid back to the IRS.


5. Itemized deductions above what’s considered normal

Let’s say your business has decided to donate a large sum of money to a charity. Well the IRS knows how much money on average a business in your income level tends to contribute. Any itemized deductions that are far above the average for your business’s income level can be a potential audit trigger.


6. Home offices that don’t meet the IRS Tax code

It’s perfectly legitimate to claim a home office however, it has to meet the strictures of the Tax Code and the IRS’s guidance. There are too many taxpayers attempting to claim their living room because they sometimes answer work-related e-mails in it, this my also be a red flag for auditors.


As a business owner, you should seek professional accounting advice for your business to ensure that taxes are prepared and filed accurately. To prepare your business’s taxes the right, legal way, then schedule a free consultation with Galt Accounting by clicking the link below:

Schedule your free consultation now:

www.galtacct.com/free-consultation



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