Red Flags That May Cause the Internal Revenue Service (IRS) to Audit Any Business
IRS Tax Audit Red Flags
Getting your taxes audited by the IRS can be a huge inconvenience but the good news is that overall, your odds are pretty low of being picked. The exact number varies annually, but as a rough approximation, the chance of being selected for review are only around 0.6%.
Wanting to avoid being audited by the IRS doesn’t mean you have anything to hide; the whole process can be onerous and time-consuming so most people would prefer not to be selected.
There are some Tax Audit Red Flags that the Internal Revenue Service (IRS) look for that increase the likelihood of your business being audited. Avoiding these won’t absolutely guarantee that your business won’t be audited by the IRS, it will help to minimize your chances.
Basic Math Errors
When you’re preparing your tax returns, there’s a lot of information to collate and it’s easy to make a basic math error. With all your attention on what figures needs to be entered and where, even the most competent individual can make a mistake.
All returns at the IRS are processed by computer so you can be certain that this type of error will be picked up immediately. It may not be enough to qualify you for automatic auditing, but it will make the IRS stop and scrutinize your accounts far more closely and highlight other areas that they want to check out in more detail.
Not Using Fair Market Value for Rentals
Real estate is a market that’s got the potential to generate excellent returns but there are some exceptions. However, if you’re claiming losses year after year you might begin to capture the attention of the IRS.
Continued losses, or even the absence of a reasonable profit, may lead the IRS to suspect that you’re not using a fair market value for your property. They may also decide to investigate whether the rental is a true arms-length transaction.
To reach a conclusion the IRS may use alternative information such as property tax to ascertain the real value of the real estate. The lower market value you use, the more likely the IRS are to dig deeper into the return.
Personal Expenses Being Deducted for Business
Deducting expenses can be a particularly complex area as you’ll need to make sure that 1) you’re deducting an allowable expense and 2) that you’re deducting it at the correct rate.
For example, it may be entirely valid to list your auto as a deductible expense for your business – but claiming 100% business use may be pushing the truth.
Hobbies are another area that are frequently incorrectly deducted, along with meals and entertainment. The latter can no longer be claimed as an expense as it’s something the IRS banned with the Tax Cuts and Jobs Act in 2018.
Business meals can still be deducted but there are extremely strict rules around the qualifying criteria, and not all of these are set out clearly. For example, the meal should not be lavish – but there’s no strict definition of what this means, and doesn’t prevent you from taking a client to a nice restaurant.
With the IRS changing the rules and the complexity around these types of deductions, it’s highly advisable to get expert advice before you make your return.
Charitable Deductions which are Larger than Expected
Charitable deductions are one area that always command a lot of attention from the IRS. Many business donate to charity but if your accounts show that you’re being unusually generous the IRS will probably want to talk to you.
The IRS has the benefit of having access to statistical data which shows them the typical value of tax donations for someone in your earning bracket. If you’re claiming charitable donations which are significantly different from what they might expect, your details will be on their radar. This will be exacerbated if you don’t fill in the necessary paperwork, such as Form 8283 for donations with a value in excess of $500.
A Business that Fails to Prosper
If your business is failing to make a profit in consecutive years and not showing any signs of improvement, it’s a red flag for the IRS. After all, who would continue working for a business that doesn’t eventually turn a profit? Not generating any profit instantly may be understandable but 4 years down the line, it should be a different matter.
Any business which is cash-based such as a car wash may need to take extra care. This type of industry will receive extra attention from the IRS because it’s much easier to cover up earnings. Make sure that you’re scrupulous about including all your income and have records that detail every transaction.
Get Help from Experts in IRS Audit Services
All of the above flags can be avoided if you get your business accounts correctly filed but with such complex laws, it can be difficult to make sure everything is lawful. APA Financial provide professional IRS Tax Audit Representation Services and can help you get everything right. This will minimize your chances of being selected, as well as helping you if the IRS do choose your business for review.
We understand that no-one wants to have to pay any more tax than strictly necessary and our expertise ensures that every potential deduction is used to the fullest. However, we don’t employ any high-risk or morally dubious strategies so if the IRS audits your accounts they’ll find everything is squeaky clean and above board. We are the Chicago-based professionals who have a proven track record in helping businesses who have received the dreaded letter through the mail from the IRS.
No-one can ever guarantee that the IRS won’t audit your business; but we can guarantee that you’ll be ready if they do. We have represented thousands of clients and are very experienced in dealing with all levels of investigations by the tax authorities. Whether you’re worried about what could happen in an audit, you want your business taxes looked at by an expert or you’ve already received notice from the IRS, APA Financial Services are here to help.
Get in touch with APA Financial in Chicago, IL today and let us help you with our experienced and Professional Tax Audit Representation Services right away.