IRS Red Flags: 7 Tax Tips to Prevent Triggering an Audit for Small Business Owners

Did your business receive a Tax Audit Notification letter in the mail? What should you do and how should you resolve this? Panic is usually your first reaction. Then after a few minutes you realize you’ve been working with a professional accountant who supports you in situations like this.

Avoiding some of the most common audit triggers is what your tax adviser should be consulting you on as a small business owner – not only during income tax time but throughout the entire year:

1. Claiming Large Charitable Contributions – Large charitable deductions attract attention – keep all supporting documentation.
2. Home Business Deductions – In the case of home office expenses, these can be deducted if the space is exclusively and regularly used as your principal place of business. Use the deduction if you’re entitled to it.
3. Sales and Use Tax Filing – Purchases that are not for resale are subject to sales tax, particularly out of state purchases, and must be tracked accordingly. Review all purchase invoices and receipts making sure you are paying sales tax. Use tax must be paid when state sales tax is not charged and no exemption applies. This area can be a little complex – consult your tax adviser or go to your states’ website for clarification and information.
4. Personal Vehicle Usage – Employees of a business who use their personal vehicles for business purpose must track mileage in a log book. Only business mileage is reimbursed at the standard mileage rate. All other expenses such as loan payments, gas, repairs, etc. are paid from the car owners personal funds.
5. Credit Cards – The IRS does not approve of mixing business and personal purchases on the same credit card. Keep all business purchases on one business credit cards and save receipts.
6. Employee vs. Independent Contractor – Employees are issued a W-2 and you as their employer will withhold and pay taxes. Independent contractors will complete a W-9 for work performed and be issued a 1099 at year end by your company.
7. Excessive Business Meals, Travel and Entertainment Expenses – Overstating deductions, especially for the self-employed, raise a flag for IRS agents. Track and save receipts on a monthly basis. Write the purpose and the client’s name on each receipt with the account code. Having a good record keeping system in place will support your audit trail.
8. Deductions that are high and unusual for the average taxpayer. Nobody knows for sure what criteria the IRS uses for selecting returns for audits but a trained preparer will know what is unusual or that could draw their attention. The preparer in most cases will know how to enter that information on your return to draw the least attention.

Never give the IRS false or misleading information – it can make the problem worse. File all tax returns in a timely fashion and review them completely before having your tax accountant file them.

Do not ignore any IRS letters you receive. Contact your tax preparer immediately and let the IRS know you are cooperating and trying to resolve the issue. Your tax adviser should be able to explain the issue and assist you with the audit.

The bottom line: Hire a professional tax preparer that does pro-active tax planning. For more information, please contact us or call (414) 269-8705.