One of the most stressful situations a business can have is a tax audit. Even the most diligent business owners can be subject to an audit, but there are some major red flags that could put your business at a higher risk. Avoid the extra risk by staying away from these red flags:
Math and Accounting Errors
While they may be simple mistakes, making math errors in your tax forms should be avoided as much as possible, especially if you are preparing your taxes yourself. Math errors will always trigger the computer and bring increased attention to your return.
Failing to Report all Income
The IRS system diligently matches all your income to the payer’s expenses, so there’s no hiding extra income earned. Report everything to avoid being investigated.
Using Very Low or Unfair Market Value for Rentals
A very low value, or even loss, from a market rental also gets the attention of an auditor. They will check the market rent for your property and compare to see if things match up.
Claiming Business Deductions for Personal Expenses
It can be tempting to claim certain personal expenses at business deductions, especially if there is a gray area to whether it’s necessary for your business or not. Stick to the defined and outlined appropriate deductions to avoid putting up red flags.
Clever Tax Preparers and Unusually High Refunds
If it sounds too good to be true, it usually is. Clever tax preparers that promise (and provide) unusually high tax refunds should be hired with caution. High refunds are great, but they also trigger the system’s curiosity and are likely to draw an audit.
Unusually High Charitable Donations
Donating to charity is a great way to impact the community and lessen your tax burden . However, donations far outside the expected amount for your income can send a red flag, as can claiming them improperly. If you donate over $500, make sure to use the correct form.
Unusually High Income
High income is the goal of most business owners, but it does come with it’s set backs. Earning a high income will increase your chance of audit substantially. Keep good books and there’s nothing to worry about.
Claiming Business Use of a Vehicle
If you claim the use of a vehicle for your business, be prepared to prove how much the car is actually used for business. It’s rare for a vehicle to be used 100% of the time for business, so avoid listing that much unless you’re ready to back it up.
Failure to Report Foreign Bank Accounts
Foreign business accounts can be a helpful way to manage money for your business, but be sure to report any foreign accounts over $10,000.
Owning a Business in General
Being a business owner is an amazing way to earn a living, but unfortunately it does attract the attention of the IRS. Just owning a business in general makes you more susceptible to audits. Again, keep your accounting straight and you’ll have nothing to worry about!
The important take-away is to be diligent with your accounting strategies and always prepare for a potential audit. When you are prepared, it makes the entire experience less painful, stressful, and damaging to your business. Take extra steps by avoiding these red flags.