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Posted by: Charles P Myrick CPA Posted on: Dec 12 2019 Posted in: small business, tax audit

What Triggers an IRS Audit for a Small Business?

I find that many small business owners who wait to deal with their income taxes do so out of fear of an audit. Procrastination does not help! A much better strategy is to face your business taxes without fear by avoiding some common triggers which could lead to an audit.

Here are ten things that are bound to draw attention to your tax return:

1. Too Many Deductions

If your business has legitimate deductions, you should not be afraid to claim them. A long list of deductions doesn't necessarily cause an audit. However, combine that with another trigger or two from this list, and it may become more of a flag.

2. Disproportionate Deductions

The IRS uses a list of basic income structures with average giving amounts. If your business giving seems to be out of proportion with your company's income, that is undoubtedly a flag.

3. Estimated Income Numbers

Numbers that seem to have been averaged, estimated, or that are inexact are going to be an issue. Remember, the IRS has copies of every tax document you receive from your employers, large reported gifts, bank dividends, and even winnings in some cases. The numbers will not line up at all if you are averaging.

4. Higher Than Average Income

When a company your size makes an out of the ordinary large sum that doesn’t closely match any projections the IRS has for other businesses your size, that could trigger an audit. Conversely, your income should not be too low either. Extreme ends of the income spectrum should cause concern.

5. Home-Based Business

The IRS expects people to get this one wrong; therefore, your home office starts with a disadvantage. If you claim parts of your home for business, those areas can never be used for personal uses, even to read a book for pleasure. You may only deduct for the exact space that you use for the business, not the entire room.

6. Yearly Business Losses

Even if you have legit losses, be ready to prove it. The IRS may suspect you are taking deductions you are not entitled to or using a hobby as your business, which is illegal.

7. Types of Deductions

Meals and any other expenses you take deductions for had better have documentation connecting those expenses with specific jobs and documented with specific receipts. If it looks like you do your personal shopping or take friends out to dinner "on the company," expect to get a notice in the mail or even a knock on the door.

8. Personal Vehicles for Business

To take off your private vehicle for business, you need to ascertain what percentage is work and what percentage is personal. If you try to pass off your private vehicle for a 100% work vehicle, be ready for the audit.

9. Cash Business

Certain types of jobs are always on the IRS radar for suspicion of hiding cash payments. These include restaurants, taxis, and salons. If your lifestyle looks more expensive than your reported income, that could be trouble.

10. Moving a Lot of Cash

You might have been saving for a long time for a large cash purchase but be ready to explain or show the accumulation, so they don't wonder how you bought a car that cost a fourth of your yearly income in cash.

Myrick CPA is here to answer all of your tax and audit questions. Do not go it alone with the IRS. Give us a call so we can get your return in good shape early enough to avoid unnecessary tax challenges.

Let us help you plan ahead for growth!


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