It's prudent to take stock of small business practices that may trigger an expensive IRS audit.
An IRS audit is sometimes unavoidable, but it is worthwhile to study the practices that make it more likely to cause the federal government to come knocking.
Sifting through the various audit trigger advice columns, several unmistakable themes are apparent. You should do the following to reduce your chance of an audit:
- Hiding income. Cash businesses like gas stations, convenience stores, etc. are among the most audited types of businesses. If you have a business that deals in cash, keep meticulous records and don't forget to declare income.
- Mixing personal and business expenses. It's tempting to write off personal expenses as business expenses, but don't blur the lines. The IRS will dig deep if the records aren't clear and convincing of a line of separation.
- Home office deduction. For some reason, the IRS seems particularly fixated on enforcing this provision strictly and many tax preparers advise their clients to avoid claiming this because any benefit gained is outweighed by the increased likelihood of an audit.
- High charitable and other deductions. If your business has relatively high deductions for the amount of income it generates, it might catch the IRS' attention. Keep careful records to show all such deductions are legitimate.
- Side business losses. If you are keeping a side business or novelty business and it repeatedly reports losses, you might draw IRS scrutiny. Usually, if you don't earn a profit three of five years, the IRS considers your business a hobby and different rules apply.
- Round numbers. If all your figures have zeroes on the end, like $2,300, etc., it is a red flag to the IRS that your business is estimating deductions, credits and other calculations instead of drawing from actual figures.
Although you should not avoid making more money in order to escape an IRS audit, keep in mind that businesses with gross incomes of $1 million or more are audited twice as often as those with lower incomes. In 2008, 5.6 percent of $1 million plus businesses were audited compared to 2.9 percent of businesses grossing between $200,000 and $1 million.
Keep in mind that using an online payroll service such as SurePayroll can help reduce the chances of a federal audit. Using an online service reduces errors and our integration with business accounting software such as Sage, Peachtree, QuickBooks and AccountEdge helps keep records in perfect harmony.
Also, we offer features like free SureAdvisor, which provides electronic labor law updates, access to business forms, compliance guidelines and human resource how-to guides.