The chances of your business being audited are fairly low, especially if you file your taxes on time through a CPA or a reputable tax program such as TurboTax Self-Employed. However, ventures of all sizes get faced with the news each year that an audit is impending.
These processes are stressful and time-consuming, so it’s a good idea to do everything you can to minimize the chances that your organization’s transactions end up under a microscope.
Even if you always try to do the exact right thing, the reality is that mistakes can happen, and auditing standards and procedures can be confusing at times. Plus, tax changes occur that can make it even harder to stay updated and in the know. As such, here are some of the most common business tax audit triggers to know about, so you can try to avoid them.
Significant Cash Transactions
Any time businesses show they deal with large sums of cash, this is a red flag to the Internal Revenue Service (IRS). There is a Bank Secrecy Act that means various venture types must notify the IRS and other federal agencies when dealing with significant cash transactions. If you spend or deposit over $10,000, the IRS is likely to wonder where the money came from, especially if the income you report doesn’t seem to add up.
The Bank Secrecy Act is in place to try to thwart illegal activities. As such, be aware that the IRS will be notified if you make large cash transactions. However, there are times when organizations do legitimate deals with cash and report this honestly. If you’re in this position, make sure you have all the paperwork required to show how and why you received or spent so much cash.
Deductions Disproportionate to Income
Another factor that can have the IRS breathing down your neck is if you make deductions at a level that’s disproportional to how much income your venture brings in. While we all want to use as many deductions as we can to lower taxable income and, therefore, how much tax we have to pay, you don’t want to go so far with this that you’re claiming more than seems feasible. The IRS will want to study your accounts more closely if they feel your deductions are much higher than the standard range for those in your income bracket.
There may be legitimate times when lopsided deductions occur, such as when you first open your business, or during times that are very slow or even where there’s a lot of business growth and you need to invest in expensive equipment or other assets to handle the expansion.
During these times, keep detailed records so you can back up what you’re claiming if you ever need to. It can help to pay expenses online, using digital platforms. This way, record keeping is easier, automated, and transparent. For example, pay your suppliers with a virtual card via a payment process that integrates seamlessly with your bank or another financial provider.
Rounded Up, Neat Figures
You might be sick of administrative and financial tasks or behind on deadlines, so try speeding up processes to get paperwork sorted sooner. However, if you’re in this position, don’t be tempted to round up or average your income just to get the work checked off your to-do list.
When it comes to tax returns, too-neat numbers seem suspicious and can trigger an audit. The IRS will study round figures closely as they convey the idea that you guessed or fudged the information you inputted or that you were sloppy with your reporting, meaning you might have made all sorts of mistakes throughout your records.
Claiming Business Losses for Too Many Years in a Row
Be wary, too, of claiming business losses continually. The IRS takes notice if people don’t make a profit year after year, as businesses are designed to make a profit, even if that doesn’t happen for the first few years after opening. Excessive loss alerts tax office staff to the idea that perhaps you’re simply having fun with a hobby and trying to claim related expenses as business losses rather than developing a profit-making venture.
Claiming expenses in this way is illegal, so triggering an alert for this situation makes you much more likely to be audited. Keep in mind that if you genuinely have multiple losses due to a few bad years, you can prove the legitimacy of your business by providing detailed records of deductions and operations.
Other common business tax audit triggers include not reporting all your income, and mixing personal transactions with business ones (especially deductions). Also, the IRS is on the lookout for numbers not adding up, vague deductions, and higher than average deductions for entertainment, home offices, vehicles, meals, and travel.
Provided you act with good intentions, though, and keep proper records and admit to mistakes when they happen, you shouldn’t find yourself with too many ramifications to worry about.