Red Flags That May Trigger an IRS Audit

January 11, 2016

Some things in life are simply unavoidable, but tax audits need not be one of them. Below are 5 ways to avoid those ‘red flags’ which may cause the IRS to dig a little deeper into your business affairs:

  1. Businesses at a loss: If the IRS spot business ventures with single proprietors recording losses, their chance of attracting an audit are high. The IRS may suspect that personal and business expenses have been combined, and that the proprietor may have made deductions to which they are not entitled. If you are the sole proprietor of a business in the red, you may want to examine your deductions and check that they’re valid under the tax code; were those ‘business drinks’ or that ‘working lunch’ really a business expense? A new business venture that has made a loss in its first year won’t be so likely to be audited, but it would be wise to try and spread the initial set up costs over several years to avoid raising any red flags.
  2. Reporting Your Entire Income: The IRS sends business owners W-2 and 1099 forms for them to report wages, interest, dividends and capital gains, and you must ensure that you include all of the information recorded on them, on your federal tax return. Any discrepancies between what business owners report and what the IRS have on file, will be flagged up and will trigger a correspondence audit, wherein the IRS will write and tell you how much money you owe based on any income that they deem you have failed to report.
  3. Mathematical Errors: If your receipts don’t match up to the 1099-K, then you might be flagged for an audit; the IRS will check your returns to see if the numbers add up, so be extra vigilant with your numbers. As the majority of tax returns are done electronically, the tax software will help ensure that the mathematics is correct, but that doesn’t mean that you shouldn’t still check your numbers for submitting your returns.
  4. Credit Card and Cash Transactions: The total yearly credit card transactions for businesses are submitted in a 1099-K form to the IRS, via credit card processors. Based on a business’s total credit card transactions for the year, the IRS can determine how much they should also have in cash sales. You may not have been targeted for an audit, but beware that the IRS will be constantly checking behind the scenes and will pick up on any errors that you might have made.
  5. Hire an Accountant: Instead of spending valuable time worrying about IRS audits and how to avoid them, why not hire an accountant and take the hard work out of your tax returns? If you do, then the chances are that you’ll sail through each financial year, safe in the knowledge that your calculations are correct and the IRS have no reason to investigate your business earnings further.

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