The word “audit” is one of the things that scares business owners the most. I’ve compiled 10 warning signs for an IRS audit that you should watch out for:
- Big deductions for meals and travel. If you have minimal business expenses in other areas but are claiming a significant deduction on “meals and travel”, you could be inviting an audit.
- Home office deduction. This deduction is available for homeowners and renters, but certain restrictions
- Mixing personal and business deductions. Save yourself the trouble and keep business separate from personal expenses to make record-keeping easier!
- Consecutive losses. If your business has been chalking up losses year-on-year for multiple consecutive years, you can be sure the IRS will be digging deeper into your books.
- Misclassifying contractors. When you misclassify workers in your business, you may be liable for employment taxes for the worker, so be sure to check which category your workers fall into.
- Under-reporting income. The IRS uses an automated system (the Automated Under-reported) to compare what you list on your return to reports they receive from other third parties. If this system discovers a discrepancy, the IRS will issue a Notice CP2000 for you to correct the errors.
- Not paying yourself a salary. As an owner of an S Corp, you need to be paying yourself a salary within certain guidelines and reporting this salary on Form W-2.
- Excessive expenses. The IRS may read these expenses as not being in line with your business model or disproportionate to your income and may start looking at your tax return in more detail.
- Vehicle deductions. As a small business owner, claiming 100% exclusive use of a vehicle for your business is difficult to prove and may be an audit red flag for the IRS.
- Gross income above $100,000. Making a large income in your business is fantastic, but unfortunately, it also raises your chances of being audited.
An audit is not fun for any small business owner. Apart from the stress and anxiety of being selected for an audit, you may also find that you end up on the wrong side of an audit and have to pay large sums in penalties.
By looking out for these 10 common red flags that trigger an audit, you can reduce your chances of being audited. Another way you can do that is by getting your book in order. Why take the risk of doing your own bookkeeping and potentially getting audited? Hire a professional to review your books and records, and sleep better at night knowing that your tax returns are problem-free.
Interested in getting a professional to look at your books? Schedule a call with us today.