The chances of getting audited by the IRS are rare, but tax audits are routine activities for tax authorities. Audits can be quite scary for a small business owner like you. You have probably heard about company closures after IRS audits.
Basically, an audit by the IRS is conducted to assess the financial accounts and information of a business. Thus, the majority of audits result from tax return discrepancies. The IRS reviews your entries to make sure everything is in order. In some audits, an audit is performed randomly. Other times, it is done as a result of suspicious activity. To avoid an audit or deal with an audit when it arises, invest in Louisville small business accounting services. An accountant will ensure the accuracy of your entries and can deal with the IRS when you get audited. To better understand how an audit occurs and how to avoid them, below are common triggers:
Data Entry Errors
Doing expense management functions and accounting manually increases your risk of tax filing errors. Your accounting system is necessary to help you understand the performance of your business and prepare for taxes.
Although the majority of accounting functions are performed electronically, data entry errors such as duplicating entries or treating expenses and income could trigger an IRS audit. Also, a misspelling of the business name can trigger an audit. This is where electronic filing comes in handy since you can load vital data from previous tax returns. If you are not sure about how you do the math, hire the services of a tax accountant. A reliable accountant can save you the stress of an audit.
Not Reporting Certain Income
An IRS audit can be triggered when you underreport your income on the tax return. The tax department does a comparison of income from one year to the next. An obvious discrepancy without supporting data can leave you getting a letter from the IRS.
The tax authorities are chasing after what you owe them. They will ensure the correctness of the tax amount you reported based on tax laws. Thus, it is just a matter of when the IRS detects the omission. This is particularly true for nail salons, restaurants, barbershops, and other cash-heavy businesses.
Questionable Deductions
Your tax returns may have itemized deductions such as home office deductions. Such deductions can decrease your taxable income, but they can also trigger an IRS audit if they do not match your income. This is the case if you make huge charitable contributions. Also, the tax authorities compare your returns to the returns of other businesses in your specific industry. They may scrutinize anything suspicious further.
Excessive Expenses
According to the IRS, qualified business expenses are ordinary and necessary. If you have significant expenses, keep all receipts in case the IRS needs to verify them. But things can get a bit more complicated when you claim meal and travel expenses as qualified expenses. It’s hard to prove they are business expenses, not personal ones.
Earning Significant Income
Usually, businesses that earn more than a million dollars every year are the ones that get audited. An audit can happen if owners of these businesses report a substantial change in income. Many organizations can earn millions in revenue suddenly in this age of social media as branding directly affects the bottom line. But when you show a significant increase in revenue from year to year, expect the IRS to send you a notice. This is the best time to have an accountant help you establish a growth strategy.
Speak with an accountant about your accounting practices, deductions, or income to determine common audit triggers. They can help you better understand your business and keep you on the IRS’s good side.