It’s tax season again, and your first quarterly taxes are waiting to be filed. Do you have all your documents and financial statements in order? You may not be thinking about tax preparation during your day-to-day, but sloppy filings and misplaced documents could make you vulnerable if you end up in a tax audit. Although businesses are typically chosen for audit through random selection, certain claims and mistakes on your filings could raise eyebrows at the IRS.
It can be overwhelming to maintain records and keep files organized, on top of running your business, but neglecting your tax preparation can result in getting audited. The likelihood of being audited varies by industry, but the possibility is a stressor for many business owners. That’s where a firm like All About Businesses comes in! We can help you avoid things that trigger the IRS to look more closely at your books, or prepare for an audit if it happens.
7 Triggers That Might Land You an IRS Audit
Tax Auditing isn’t always about doing something wrong – it’s often about patterns that stand out. When you get selected for an IRS audit, it’s usually because something stood out as strange or potentially incorrect, and they want to ensure accuracy. Here are some things to keep in mind if you want to avoid unwanted attention from the Internal Revenue Service:
- Excessive Deductions: We love a nice deduction or credit on our taxes, but claiming too many can look a little fishy to the government. If your business deductions for one year are suddenly much higher than in previous years, or disproportionately high compared to your revenue, the government will want to ensure your numbers are correct. Most industries exercise some restraint when claiming deductions on business vehicles, client meals, office expenses, and more. If you aren’t sure where to draw the line on your deductions and credits, our tax specialists can help take the guesswork out of it.
- Rounded Numbers: When you’re dealing with larger numbers, it’s common to want to round up when filling out your taxes. However, the IRS gets suspicious of numbers that are “obviously” rounded, such as $50, $100, etc., simply because the money we earn and spend doesn’t usually come in whole numbers. It may be acceptable to round a few cents or up to the nearest dollar, but rounding up (or down!) to the nearest 10 or 50 will be a red flag.
- Calculation Errors: If numbers and math aren’t your strong suit, tax season can be an incredibly stressful time. The IRS is on the lookout for empty number fields, rounding and calculation errors, because consistent mistakes may look like an attempt to avoid paying your full tax requirement. Before submitting your documents, check your work two or three times and be sure your documents are signed!
- Large or Frequent Cash Transactions: Cash-heavy businesses like salons, taxi services, restaurants, and bars face more scrutiny because cash transactions are harder to track than digital payments. If your business has frequent cash deposits or withdrawals, we recommend keeping thorough documentation of your transactions and reviewing it regularly. Large payments can look suspicious to the IRS and require clear records to show what that money was for. There’s an additional form to file for cash payments over $10,000. If you have a cash-based business and need help figuring out how to properly track and record cash payments, speak to a professional for guidance.
- Payroll & Contractor Classification: Businesses that rely on independent contractors may have a higher risk of audit selection, especially if the IRS believes your employees are misclassified. Some businesses use the independent contractor classification to intentionally reduce their payroll, benefits, and business insurance costs. If you hire independent contractors, maintain thorough documentation of the work they perform for your business.
- Repeated Business Losses: Running at a loss is normal sometimes, but year after year losses may signal that your business is a hobby in the eyes of the IRS, or that you aren’t reporting numbers accurately. We recommend keeping meticulous records if your business has an expensive year. Whether you’re expanding, buying new equipment, paying for training, or any other legitimate reasons to be at a loss in any given year, keep in mind that large expenses will catch someone’s eye.
- Self-Employed Business Owners with High Incomes: If you’re self-employed and classified as a Schedule C sole proprietor, your success often comes with a side of skepticism from the IRS. Tax returns for sole proprietors tend to be complex and leave room for errors, so the IRS will want to make sure everything is properly reported.
How to Prepare for an IRS Audit
At the end of the day, clean books, consistent reporting, and solid documentation are your best defense. There is a three-year window for audits to occur, so we recommend keeping documents and financial history for the previous 4 years. While there is no way to eliminate the possibility of getting audited, you can manage the risk by keeping these triggers in mind while completing your paperwork. Follow these tips to set yourself up for success:
- Keep Accurate Records: Maintaining accurate financial records sounds like a no-brainer part of running your business, but record keeping is make-or-break in the world of audits. In the event of an IRS audit of your business, you’ll need documentation such as receipts, invoices, and bank statements to support the information you’ve reported. We provide support for organizing and maintaining records.
- Work With A Professional: Hiring a virtual bookkeeper from All About Businesses can help take the stress out of filing your taxes! Our accounting services are designed to help you keep your business’s financial information organized and accessible throughout the year, and assist with tax preparation to reduce the risk of errors. If you’re selected for a tax audit, we’ll help you navigate the audit process, answer any questions you have, and help organize the information you need to provide the IRS.
- Respond Promptly: If you receive a notice from the IRS that you’re being audited, respond promptly. Having your financial records already organized will enable you to respond in a timely manner, helping you avoid late penalties and fees.
In addition to these tips, the IRS’s website offers several resources to ensure you understand the audit process. If the IRS finds inconsistencies in your tax return during an audit, it will issue a report outlining its conclusions. You’ll have the chance to respond to their assessment, either with corrections or proof that your original information was accurate. With organized information and bookkeeping, you can respond to audit notifications with confidence!
Let Us Help You Audit-Proof Your Business!
As a business owner, you have enough on your plate without adding tax problems and audits. At All About Businesses, we’re dedicated to helping you streamline the tax filing process. From bookkeeping services and information organization to tax preparation and responding to audits, our virtual team can provide all the financial management assistance you need!
If you are currently facing an audit and looking for support, don’t hesitate to reach out for the help you need. It’s worth noting that an audit can serve as a tool for improving your business or financial management. The audit process will identify reporting inconsistencies and shine a spotlight on areas such as tax law compliance and fraud prevention. As you discover and address these issues, you’ll reduce the risk of future audits and feel confident in the accuracy of your records. Let All About Businesses help you stay on top of your finances – contact us today!
