Small Business Red Flags: Tips To Avoid An Audit

In addition to all the normal stressors of owning and maintaining a small business, the prospect of being audited simply adds to that stress. That stress is sometimes warranted—audits can lead to paying substantial fines or even prison time for those held responsible. 

The best way to avoid extra fines and jail time is to avoid being audited in the first place. In this blog, we’ll discuss the ways in which your business can avoid being singled out by the IRS and what to do if it happens anyway. 

1) Be Careful With Your Deductions

Deductions are an excellent way to keep more money in your business and invest more in growth and your staff. But going overboard with your deductions can also be a flashing neon sign for the IRS to take a closer look. 

The IRS uses a program to estimate how many deductions you are likely to have based on your income, industry, and other factors. If you deviate too far from what’s expected, the system will paint your tax filing as suspicious and perhaps worthy of further review. 

This does not mean that you shouldn’t take advantage of all of the deductions that apply to your business. In fact, many businesses leave thousands on the table in fear of being audited. 

Working with a quality CPA will ensure that you take advantage of all the deductions that apply to your business, without claiming deductions that aren’t allowed by the IRS. 

2) No More Expensive Entertainment Events 

As of 2017, entertaining clients is not a viable tax write-off. Taking your client to an Alabama game? Sorry, you’ll have to take care of that on your own dime. 

Business meals can still be deducted, however, as long as the food and beverages are not lavish or extravagant. Basically, keep it simple and you’ll be good to go. 

3) High (Or Low) Income

This part applies to individuals and business owners alike. If you (or your employee salaries) have an uncharacteristically high income, the IRS may flag that as suspicious. 

It is uncommon for anyone in the middle-class to be audited since the likelihood that they are “gaming the system” is slim. However, those with extremely high amounts of money are more likely to be doing something the IRS doesn’t like.

Interestingly, having a very low income also puts you at a higher risk of being audited. 

4) You Own A Cash Business

Own a cash business? Unfortunately, you are at a greater risk of being audited. 

The reason, as you could likely guess, is the struggle to verify the income received and the ease at which some businesses can use cash for nefarious purposes. 

Some businesses that the IRS pays special attention to include: 

  • Used car sales
  • Handyman businesses
  • Pet sitting
  • Construction (in some cases)
  • Child care
  • Bodegas

While the IRS will have a closer eye on you, there are a few ways that you can make your business less likely to be audited. 

Always make sure to keep very detailed records of your business transactions. In the event you are audited, a very detailed account of your business transactions can be a good way to make the audit move smoothly.

You should also be aware that any cash transaction of $10,000 or more must be reported to the IRS in a special way. Learn more about that process here

5) Overseas Assets

Overseas assets are a huge red flag for the IRS, largely because of how often businesses and individuals skirt the tax system with overseas cash havens. 

If the IRS determines that you have foreign accounts with a balance higher than $10,000, you may be in for major fines. Be sure to mention all foreign assets just to be safe, but the IRS may still audit you to take a second look. 

6) Vehicle Claims 

Using a personal vehicle for business reasons can also make an audit more likely, so it’s best to have a dedicated business vehicle if possible. 

If that’s not possible, have very detailed records of the business use of your personal vehicle just in case. Vehicle claims are another often exploited aspect of the tax system. 

7) Making Amendments

Amendments to your tax filing are a big red flag to the IRS. Amendments aren’t processed any differently, but they will imply to the IRS that your tax return may be incorrect. 

If you have made big mistakes on your initial return, by all means, file an amendment. If the mistakes are minor, though, you may be better off leaving it alone. 

Choose Sovereign CPA For Flawless Filing

At Sovereign CPA, we understand the stress that tax season can bring for small business owners. For years, we’ve helped business owners in Alabama handle their taxes so they can focus on what matters. 

Give us a call or stop by our office to get your business’ taxes set up right! 

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