As a small business owner, you have enough responsibilities and worries everyday without worrying about having to endure an IRS tax audit. Surely, an audit is the last thing that you want to find yourself faced with. A fear of missing receipts, inaccurate calculations, non-compliant bookkeeping and accounting procedures or entirely disorganized financial records is every bit real when it comes time to be audited.
The team here at Tax Alternatives wants to take this time to outline some red flags that can ultimately trigger an IRS audit. Having the right policies, procedures, preparations and back-office systems in place, can help avoid an audit or if audited, make your audit, worry-free.
Be Aware of These Tax Audit Triggers
As a small business owner, it is important you are aware of the red flags that can typically trigger an IRS audit. Let’s take a look at them now.
- Inaccuracies including typos and other errors – Missing 1099 forms is one of the biggest triggers for small business audits. Typing mistakes and math errors are also common red flags that can ultimately result in a tax audit. Be sure to double check all your work and calculations and ensure that all the appropriate forms are attached.
- Lots of cash transactions – It is best not to operate a cash based small business since these are direct targets for an IRS audit. Cash transactions are very hard to track which means the IRS is more apt to want proof of transactions with regard to income vs. deductions. Proper records and transaction documentation is critical with a cash-based business. Try to avoid cash transactions whenever possible.
- An abundance of deductions – If you elect to claim an excessive amount of deductions with regard to your business revenue, chances are you will set off a red flag. It is important that you follow all the IRS regulations when deducting expenses. Whether home office expenses, business vehicles, or travel, meals and entertainment expenses related to your business, make certain you are not over deducting. Also, be sure that you have all the proper documentation and receipts with regard to any deductions claimed.
- Recurring losses on a Schedule C – Although it is perfectly normal for a start up company to experience losses, it is not normal to suffer continuous losses year after year. If you show recurring losses year after year, this may very well trigger an audit and particularly for those who are registered as sole proprietors. Be very careful on how you report business losses and make certain you are not filing continuous losses each and every year.
- S-Corps that have no salaries paid – If you have elected to register as an S-Corp, be sure to at minimum pay yourself a salary and report it with a W-2 form. If your S-Corp presents with no salaries paid, there’s a good chance the IRS will target you for an audit.
- Employing more contractors than employees – There is nothing unusual about a small business hiring contractors. However, showing that you have hired more contractors than employees can easily trigger an IRS audit. The IRS tends to believe that business owners are not actually hiring more contractors, but rather may be misclassifying their employees as a way of avoiding payroll taxes and employee insurances. Go ahead and hire those contractors, but be cautious to follow the IRS guidelines for employees.
Be Prepared for An Audit with Our Trusted Professionals
Here at Tax Alternatives, we are committed to meeting the individual needs of all our valued clients. We want to assure you that when you team up with our accounting and bookkeeping professionals, we can help you to create and design the perfect back-office procedures. We offer the highest quality technology and tools along with the highest levels of knowledge to design internal procedures and controls that will ensure you are prepared and ready for any tax audit.
We also offer the best all round tax filing and preparation services this side of Brentwood. When you choose to put your trust in our team you are putting your trust into the hands of some of the absolute best in the industry. Should the IRS come knocking on your business door, rest assured our team will have you covered. For more information about how to be prepared for a small business tax audit, or about the many outsourced services we provide, give a shout out to our team today. We look forward to serving you and to helping you to avoid having the IRS come knocking on your business door!