As we move into 2024, the IRS continues to refine its focus during audits. Following are five areas of scrutiny that could trigger an IRS audit. Addressing these can help business owners safeguard against unwanted IRS attention.
1. Inaccurate Income Reporting:
Income discrepancies remain the primary concern during an IRS audit. Milikowsky emphasizes the importance of verifying income through a wage and income transcript, which reflects all income reported under your social security number. This preemptive step can prevent discrepancies and ensure accuracy on your tax return.
“Before you file your tax return, it’s essential to contact the IRS and request a wage and income transcript. This document is a comprehensive record of your reported income and is instrumental in avoiding audit triggers related to income reporting.”
2. Business Losses:
Repeated business losses are a significant red flag for the IRS. Losses can prompt the IRS to question the legitimacy of a business’s operations. Milikowsky shares an anecdote to illustrate this point, detailing an audit case involving a yacht leasing company.
“If your business reports losses year over year, the IRS might question whether it’s a viable profit-driven enterprise or merely a hobby. It’s imperative to ensure your losses are justifiable and your business model is clear.”
3. Real Estate Losses:
For real estate owners, losses can attract IRS attention, particularly if the property isn’t being rented or isn’t available for rent. Maintaining meticulous records and ensuring compliance with rental availability are critical to substantiating deductions. Keep excellent records of your income and expenses related to real estate. If you’re claiming losses, the property must be available for rent, and all deductions should be well-documented.
4. Cryptocurrency Transactions:
With the rise of digital currencies, the IRS has sharpened its focus on cryptocurrency transactions. Milikowsky warns of the complexities involved in reporting decentralized wallet activities and the importance of being transparent about cryptocurrency accounts during an audit.
Cryptocurrency has changed the tax landscape significantly. Accurate reporting of transactions and clear communication regarding these accounts are vital to navigate an audit successfully.
5. Employee Retention Credit (ERC):
Lastly, the Employee Retention Credit has become a focal point, especially for businesses that received PPP loans. Milikowsky advises careful calculation to avoid ‘double-dipping’ and to ensure the separation of wages paid with PPP funds from those paid with the company’s own funds.
“The intricacies of the ERC require a meticulous approach to prevent any overlap with PPP-funded wages. It’s essential to conduct a thorough analysis to validate your claim.”
Awareness and preparation are your best defenses against an IRS audit. By understanding these five red flags and taking proactive measures, businesses and individuals can minimize their audit risk and navigate the 2024 tax season with confidence.
For personalized advice or assistance with an IRS audit, contact Milikowsky Tax Law, we keep businesses in business.