The last thing anyone wants is a letter from the IRS. For small business owners, though, it's not just a nuisance; communication from the IRS can bring with it very real stress, anxiety, and disruption to your daily operations. Fortunately, being aware of and understanding what might prompt an audit sets you up with a better chance of avoiding unnecessary attention in the first place. If you're a small business owner in D.C. or the surrounding area, here's what you should know about the most common IRS red flags and how to steer clear of them.
Common IRS Audit Triggers for Small Businesses
The IRS doesn't share a specific checklist of items for a small business that could trigger an audit. However, experienced tax professionals can identify patterns that tend to attract closer scrutiny.
- Large or Unusual Deductions: If your small business expenses seem disproportionately high compared to your reported income, the IRS may take a closer look. For example, claiming a high travel budget on modest revenue can raise eyebrows.
- Rounded or Estimated Numbers: Filing with neatly rounded numbers like $5,000 or $10,000 for multiple categories can look suspicious. Real expenses are rarely that clean.
- Unreported Income: If your small business receives income that doesn't show up on a 1099 but should still be reported, failing to do so can trigger an audit and potential penalties.
- Cash-Heavy Operations: Small businesses that rely heavily on cash, like food trucks or salons, often receive more scrutiny since cash income is harder to trace.
- Multiple Years of Business Losses: While early-stage losses are normal, reporting losses year after year without turning a profit may lead the IRS to question whether you're running a business or a hobby.
- Aggressive Home Office Deductions: Home office deductions are perfectly legitimate, but only if you follow the rules. The space must be used exclusively and regularly for business, never for personal use.
How to Reduce Your Risk of an Audit
Staying compliant doesn't have to be overwhelming. Here are a few steps that can help you file with confidence:
- Keep detailed records and receipts for all of your small business transactions.
- Avoid guesswork when reporting income or expenses.
- Make sure your deductions match your business type and size.
- Don't rush through tax prep at the last minute.
- Work with a qualified CPA who understands your business and can help you stay in compliance.
What to Do If the IRS Contacts You
Receiving a notice from the IRS doesn't necessarily mean you're being audited. Sometimes letters are requests for clarification or additional information. That said, it's vital to respond quickly and accurately.
Before making any moves, though, you should always reach out to a trusted CPA. A professional can help you interpret the letter and figure out the best course of action, whether that's providing more documentation or preparing for a deeper review.
How a Professional CPA Can Provide Support
When the IRS comes knocking, you shouldn't have to face it alone. Myrick CPA offers small business clients comprehensive support through our Tax Service Guarantee. These services can include:
- Careful evaluation of any IRS or state correspondence
- Clear explanations of what's required and what your options are
- Professional document review and organization
- Drafting letters and responding on your behalf
- Tax Representation throughout the audit process, if needed
The Bottom Line: Peace of Mind Is Part of the Plan
Running a small business is already a full-time job. Dealing with the IRS shouldn't be added to your plate. With Myrick CPA's trusted support, you'll have a team that understands the audit process and knows how to help you avoid common missteps.
Do you have questions about deductions, audit risks, or past IRS notices? Contact Myrick CPA to learn how our year-round support and tax advisory services can help you run your business with clarity and confidence.
