For most small business owners, getting audited by the IRS is their biggest nightmare. However, just a small percentage of tax returns are actually audited. Are you at risk? Your chances of being audited depend on several factors, including your revenue, what you're deducting and claiming, the nature of your business and if you own foreign assets. To avoid an audit by IRS, take a look at these 5 commonly flagged issues.
1. Entry Errors
This may not seem fair, especially if it's an honest mistake, but if prepare a tax return that doesn't match up with the numbers the IRS has, this can put you at risk. If you're not comfortable and/or sure that you can accurately keep your books in order, outsourcing your bookkeeping is a wise move.
2. You forget to enter a form
From 1099 forms to W-2 forms and beyond, if you lose or forget to show the IRS that you've made money or paid money, they will know. This is especially important for business owners who may receive multiple forms of income from various sources.
3. Taking higher than usual deductions
If your return's deductions seem extremely large when compared with income, this could be a reason to audit. This also holds true for charitable deductions. But as long as you have documentation to back it up, you should be safe. It's important to keep every receipt and accurately record what expenses are used for.
4. Claiming a vehicle for 100% business use when no other vehicle is available
Most people aren't using a vehicle all the time for only business if they don't have another form of transportation. This can vary depending on your business, but be careful about buying a vehicle late in the year as a write-off and then stating that you'll use it 100% of the time for business purposes.
5. Your business is a sole-proprietorship which deals with cash
If you're frequently accepting and paying cash, the IRS can get concerned about skimming and other practices involved with not reporting all income. If your business looks more like a hobby, and you're claiming deductions for things that aren't legitimately business related, you are at risk for being audited.
The best way to avoid an audit by the IRS is, to be honest, report accurately, and don't try to sneak in unqualified expenses. If you think your business may be at risk, one of the best things you can do is hire a bookkeeper to accurately track, record, and prepare tax forms on your behalf. The team at The Bean Counters Bookkeeping hold accounting degrees and are well versed in how to handle business finances properly.