Every business owner fears the dreaded tax audit. It can be a headache, requiring a lot of precious time to retrace your steps the previous year and provide documentation to support the information on your tax forms.
No one can predict an audit, but there are some common factors that can increase the chances of your business becoming the next tax audit target. Here are five common reasons the IRS may take your business to task this tax season.
1. Claiming Large Business Deductions
If you took large business deductions, be aware that you might be called upon to defend yourself. It’s easy to fudge the lines when reporting self-employed earnings, because business and personal use tend to blend so frequently. Tax auditors are well aware of this fact, and are on the lookout for this. For example, the home office deduction is easily fabricated by individuals claiming that the family computer and desk apply, which makes it a common touchpoint for auditors. Unless you have a dedicated area of your home that is used for business only, claiming a home office deduction can be risky business. The same goes for your vehicle. For small business owners, owning a vehicle solely used for business purposes is rare. Therefore, claiming sole use of a vehicle for a small business can also raise a red flag. There’s nothing wrong with claiming business deductions, but it’s important to be able to defend your travel expenses, office space use, and vehicle use appropriately.
2. Failing to Report All Income
If you work for someone else and receive a W-2, the income you make is verified by a third-party, and therefore not up for speculative interpretation. But when running your own business, you are the one in charge of reporting your income. It’s easy to leave out payments or forget to track multiple sources. But this is another area where the IRS knows 1099s can get lost, accurate record-keeping can fail, and income reports may come in low. Making sure that you have a clear and direct reporting of all of your income is an important way to protect yourself from unintentionally flagging an audit.
3. Reporting Large Losses
Maintaining a business is tough work. But claiming a big loss on real estate, trading, or other endeavors can cause auditors to take a second look. A large change in income can do the same. There are many specifics about what types of businesses can claim what kinds of losses; be sure you understand them before doing so.
4. Being Especially Charitable
Charitable donations are a great way to obtain a tax deduction while doing some good in the world. But be sure you can back up every dollar you claim in donations, as this is another area that auditors look at closely. The IRS is often looking for those who are bolstering their charitable numbers without the receipts to prove it. Auditors know what average charitable contributions look like at each income level, so numbers that fall out of line with normal expectations may raise an alarm. This shouldn’t deter you from giving — just make sure you keep all of your receipts for your charitable donations so that you can provide the proof if necessary.
5. Making Simple Mistakes
Simple mistakes on your tax form can spell trouble if you’re not careful. Minor, inconsequential errors and disparities where numbers don’t add up can catch the eye of an auditor. Filing via a tax professional can help prevent this issue, but it’s always helpful to do a final sweep before sending off your final tax forms. Remember: it doesn’t take deliberate deception to draw the ire of the IRS. Sometimes, simple mistakes can.
If you are hit with an audit, you’re entitled to have an advocate on your side. A tax attorney can examine your situation and represent your best interest at all times with the IRS. Get in touch with Milikowsky Tax Law today if your business is being targeted by the IRS.