A tax audit is something that can stress out any business owner because it spells trouble with the IRS. The possibility of your business being audited is relatively low if you have been prim and proper with your tax returns and payments. However, it is always better to be prepared about handling an IRS audit. At the same time, you should be aware of the red flags that can have the IRS initiate the audit proceeding for your business in the first place. Avoiding them can help you prevent the situation altogether. Here are some IRS tax audit triggers that you should avoid.
Having Income That Is Higher Than Average
If you claim a higher than average income, you have good chances of getting an audit notice from the IRS. People who fall in the higher income bracket should, therefore, be extra careful. It is important to maintain meticulous financial records all the time in case you get a call from the authorities. The best bet is to have a qualified tax professional handling the statements and filing your taxes. They also ensure that all your expenses and bills are managed and there are no mistakes with the financials or tax returns.
Claiming Business Losses Year After Year
While high income can be a trigger, you may also face an audit if it is just the opposite. Claiming business losses year after year is another common reason for being audited by the IRS. If you are running a legitimate business that consistently reports losses, the authorities may assume that you are taking deductions that you are not legally entitled to. However, the problem may be a genuine one when a business owner experiences a few bad years. You should have legitimate records to validate the deductions in such an event.
Consistent Delay in filing of returns and tax payments
Another reason why you may face the wrath of the IRS in the form of an audit notice is when you are consistently late with filing your returns and paying the taxes. According to experts at Timothy S. Hart Law Group, not respecting the deadlines is most likely to get you into trouble, with good chances of receiving an audit notice sooner rather than later. Even worse, you may have to pay interest and penalties on the taxes due.
Taking Deductions Disproportionate To Income
As a taxpayer, you may be entitled to some deductions from the taxable income. But large deductions that reduce the taxable income to a significant extent and are out of proportion to your income can be a major red flag for the IRS. For example, a small business with low income can get into trouble if it claims deductions that are much larger than optimal for that particular income range. However, lopsided deductions may still be considered legitimate in some cases, such as a lean year for your business or when the business just starts up.
Claiming Home Office Deductions
The IRS is extra vigilant about the taxpayers who claim home office deductions. Since the rules and requirements for such businesses are complex, people often get them wrong and there is a scope of errors. So the authorities are more likely to send you a notice if you run a home office and claim massive deductions. Also, the amount of home office deduction should not be greater than the gross income after business expenses. The best approach would be to seek guidance from an expert while filing taxes and claiming deductions.
Running A Cash Business
Besides those who operate from home, another category of businesses that is more likely to get an IRS audit notice is cash businesses. These are the ones that deal mostly in cash and include restaurants, bars, salons, car washes, and taxi services. Since it may be easier for cash businesses to report any income that is lesser than the actual income, they are always under scrutiny. Even if you may be completely clear and honest, you can still expect an audit notice. The IRS will keep an eye on your lifestyle and if it seems too lavish for your income, they will send a notice.
Claiming that you are using your vehicle for 100% business use, taking excessive deductions for business meals, showing your hobby as a business and shifting your income to charities are some other reasons that may get you an audit notice. Steering clear of these triggers can help you cut down the chances of trouble. At the same time, you should always be honest with your records and taxes so that you are on the right side of the law.
