Small Business Owners Should Be Aware of These Tax Audit Triggers
Small Business Owners Should Be Aware of These Tax Audit Triggers
Operating a small business is difficult enough without the worry of facing a potential tax audit. Not only can you minimize your risk by filing accurately and on time, but there are some red flags that the IRS looks for when determining who to investigate. Below we’ll discuss some small business tax audit triggers the IRS looks for when determining who to audit.
Reporting Higher Income
This audit trigger isn’t something you can avoid as you must report income accurately, but you should be aware that a higher business income may put you at greater risk of an audit. Typically, businesses that earn in excess of one million dollars can signal a red flag, and once a business earns greater then five million dollars, the chance of getting hit with an audit nearly doubles.
Exhausting All the Deductions
Claiming too many deductions can sound alarm bells for the IRS, particularly for meal and entertainment, vehicle, and home office deductions. According to the IRS, valid business expenses must meet these two criteria to qualify as a deduction: ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate, but not necessarily indispensable, for your trade or business). Be sure to keep accurate and detailed records and receipts of these expenses.
Claiming Business Losses Year After Year
If your losses consistently outpace your profit, the IRS will want to know if your business is in fact trying to make money. In short, is your business legit? If you claimed losses in a year when your business gets audited, be prepared with documentation to show your business’ revenue and expenses throughout the year.
Having Large Cash Transactions
While cash is more difficult to track than credit card transactions, the IRS does have a way to calculate your business’s cash transactions in a given year. This is done via a classified formula using the 1099-K forms that credit card processors submit to the IRS. If your reported cash sales fall below what the IRS’s formula detects, your business could be at risk of an audit. Be sure to maintain accurate records of cash transactions so you are able to show your own detailed tracking of cashflow through your business. You’ll also want to file Form 8300 if your business accepts any cash payment over $10,000.
Prepare for an Audit
Various concerns can cause a small business owner to lose sleep, but an IRS audit shouldn’t be one of them, as long as you keep accurate records for business income and expenses each year. Using reliable accounting software or enlisting the services of an accounting professional to help navigate the complexities of business taxes can help to be sure that your recordkeeping is free of any mistakes.
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