Do you think your small business has no chance of getting an IRS audit? It’s true that the government audits larger businesses more often, but you are not invisible. Even if the IRS chose only 1% of all small businesses, over 200,000 companies would be audited. Are you confident your basic accounting program can stand up to an audit? Avoiding IRS Audit Red Flags could mean steering clear of being audited.
An audit is a review of your business’s financial records. The IRS makes sure you reported correct information. If the IRS finds that you made an error on a report, you could face penalties.
As a small business owner, you do not have time to deal with an IRS audit. While the IRS randomly assigns some audits, there are steps you can take to lessen your chance of being selected. Watch out for these five IRS audit red flags to avoid an unnecessary headache.
Red flag 1: You write off personal expenses as business expenses
You can deduct business expenses from your tax return. Some expenses (e.g., office equipment) are fully deductible. Some expenses, such as meals and entertainment, are only partially deductible.
Rules for writing off business expenses
There are specific rules for writing off business expenses. You can never claim personal expenses as business expenses. Usually, if an expense was not used exclusively for your business, you must be careful. For example, you might claim a vehicle that you use for your business and personal life. You can only claim the mileage driven for business operations. Personal mileage use, including your commute to your business from your home, is not tax deductible.
IRS audit red flags might be raised if you claim a home office deduction when you rent office space. If you claim over 50% of your home as business space, the IRS may audit you.
Red flag 2: You make errors on IRS forms
Returning IRS forms with incorrect information can raise an eyebrow at your business. A simple math error may turn into a much larger problem. If you omit information or write down a wrong Social Security number, you may also be in danger of an audit.
Be sure to check your information, figures, and calculations several times before filing forms. If you use software to file taxes, be sure you understand how to use it before you begin.
Red flag 3: You misclassify workers
You must classify every person who works for you as an employee or independent contractor. Classify workers by using the Department of Labor’s six economic realities test.
It is important to classify workers correctly for filing and depositing taxes. If you classify a worker as an independent contractor, you do not withhold taxes. Misclassifying a worker might cause IRS audit red flags to be raised.
The IRS is likely to look into your business if you pay more independent contractors than you do employees. The government may believe you are misclassifying workers on purpose to avoid payroll taxes. This makes your business a target for an audit.
Red flag 4: You miss tax deadlines
You know missing a deadline does not look good. When you file your taxes late, or fail to file at all, the IRS notices. Missing tax deadlines gives the IRS the impression that your financial records are unorganized.
You need to make sure you meet all deadlines, not just your yearly tax return. Be sure to mark down important tax deadlines to file on time.
Red flag 5: You run a cash business
The IRS often watches businesses that deal mostly in cash. Cash businesses include car washes, restaurants, and barber shops.
Cash businesses are more likely to underreport income to the IRS. It can also be easier to make a mistake on financial reports for cash businesses. If you own a cash business, be sure to keep careful records of all your transactions.
IRS audit red flags aren’t the end
The best way your business can avoid an audit is simple: keep organized records, report accurate information, and meet deadlines.
Use a small business accounting software to keep your business’s records organized. Accurate information with Patriot’s accounting software could mean the difference between a smooth tax season and an IRS audit. Try us for free today!