In 2017, the IRS collected over $3.4 trillion dollars from US taxpayers. But they also issued $437 billion in tax returns after processing over 245 million tax returns.
While no one enjoys paying their taxes, most of us do it. In fact, according to a 2017 Comprehensive Taxpayer Attitude Survey (CTAS), 95% of those polled said they believed it was their civic duty to pay taxes.
But that doesn’t mean you won’t end up being audited. And if that happens, it’s not only stressful and a huge hassle, it can end up costing you time and money to gather everything together.
That’s why understanding what the common IRS audit triggers are is so important. To help you avoid the IRS making a visit to your small business, keep reading.
We’re sharing with you the five most common IRS audit triggers and how to avoid them.
1. Mixing Business With Personal Expenses is One of the Biggest IRS Audit Triggers
Being audited can end up costing you a lot of money. It also takes time and effort to collect all your information to back up the claims you’ve made.
Especially if you’re not exactly well organized. Many small business owners don’t take the time or effort to keep their personal and business expenses separate.
This can create problems because it’s really easy to confuse a personal expense with a business expense. All of a sudden you’ve erroneously claimed your new sofa as a business expense even though it’s not used for business purposes.
It’s fairly easy to keep your business finances apart from your personal finances. Keep separate credit cards for personal and business. Keep receipts separate.
The IRS Has a System
The IRS has a very good system to decide who they audit. They compare all tax returns to what they consider “industry norms”.
If your return is outside that standard, it gets flagged and an auditor examines it. The auditor then makes the decision whether or not to open an investigation.
2. Businesses That Handle Large Amounts of Cash
IRS tax auditing is more common with businesses that handle large amounts of cash. That makes sense since cash is much harder to track and trace.
Which means, if you’re in a cash business such as a bakery, bar or laundromat, you’re more likely to have the IRS take a closer look at your tax returns.
But there is a way to lessen the likelihood of being red flagged for an audit. You just have to be mindful of your register setup.
The IRS is well aware that many cash-heavy businesses often intentionally misreport taxable transactions. They do so by using one cash register to process credit cards and a separate cash register for cash.
If you’re currently using this method, beware that you’re at risk for an unwanted audit.
3. Compliance Issues Unrelated to Taxes
The IRS isn’t the only entity capable of performing an audit. In some states, you’re more likely to be audited by the state itself than the IRS. That’s because they realized how much money they can collect by taking a closer look.
And even your documentation can get you into hot water if you’re not up on the latest compliance regulations. State agencies often do an investigation and look with a keen eye for whether or not you’re compliant with the following:
- Income tax
- Payroll tax
- Sales tax
- Unemployment tax
- Worker’s compensation
State auditors will ask to examine your general ledgers, contracts, sales and purchase invoices, bill of ladings and other documents. Auditors will take notice of any outside vendors or customers who aren’t in compliance with regulations.
4. Taking Higher Than Average Deductions
What triggers an IRS audit? Taking high amounts of deductions compared to your income.
The IRS can pull your file to review it. One of the reasons your tax returns are scrutinized is because there are too many meals and entertainment deductions.
They also flag higher than average charitable donation deductions.
However, just because you have higher than average deductions, it doesn’t mean there’s something nefarious going on.
Just make sure you keep all of your documentation to prove it. Just because there’s a chance you end up flagged for an audit doesn’t mean you shouldn’t take every single deduction you possibly can.
Don’t overpay the IRS just because you’re afraid of an audit.
5. Amending a Tax Return
Many people fear that if they a late tax return, it increases their chances of an audit. But does filing an extension increase chance of an audit?
Not really. Turns out that millions filing an extension each year and it’s really easy to do so. You don’t even have to sign the form. And the extension is automatic.
The IRS doesn’t even approve the extension so filing one won’t set off any red flags. If you do file for a late extension, take the time to gather your records and getting professional advice. You don’t want to risk making any mistakes.
Because what you really don’t want to have to do is file an amendment. There is a much bigger amending tax return audit risk since they’re more likely to be scrutinized for errors.
If you do need to amend a return, file your amended taxes correctly the first time so you don’t have to repeat yourself.
Get Professional Help With Your Taxes
If you’re being audited, you need the professional help only an accountant can provide. But even if you have never been audited, it’s always smarter to know exactly what IRS audit triggers to avoid.
A business owner is busy. They’re too busy to understand and comply with the latest tax laws. That’s why hiring a professional accounting firm is the only smart decision to make to ensure you only pay what you owe.
Take some time to find a firm that understands your business. Make sure their other clients are happy with the work they provide.
We can help. And we even offer a free consultation to first-time clients. Don’t wait until it’s too late. Contact us today.
