Small Business Accounting: Top 9 Reasons for an IRS Audit

Small business tax preparation can be complicated, especially for small business owners unfamiliar with tax law. A simple mistake or slight exaggeration could warrant an audit from the Internal Revenue Service which could be extremely costly for your small business.

The best way to minimize your chances to be selected for an audit is to hire outsourced accounting services that prepare your books year-round. This way, come tax season, you will have everything you need to ensure 100% accuracy when you file.

You may be wondering how your small business could even be chosen for an audit. An IRS software program may randomly select the taxpayer and compare the return to other similar returns to detect any anomalies, or the taxpayer in question may be linked to a family member or business partner who is being audited.

Below, we have broken down the top 9 reasons the IRS will audit your small business

1. Data Entry Errors

Data entry errors are easy to make any time someone is transferring information from one place to another. An audit can be triggered by something as simple as entering your social security number incorrectly or misspelling your own name. Making math errors is another trigger. Hiring professional outsourced accounting services can help ensure data entry is 100% correct. Most of the time, small business owners don’t have the time to double and triple-check numbers. When you hire outsourced accounting services in Gilbert, however, this is their job and you can easily eliminate data entry errors that could trigger an IRS audit.

2. Unreported Income

Trying to decrease your taxable income by leaving a few dollars out from your total income can be tempting. It is important to beware that the IRS receives copies of the same income reporting forms you do, from copies of your W-2 and Form 1099. The IRS also receives information about alimony, K1 income, and foreign bank accounts, so leaving the income from your side-hustle off your tax return isn’t a good idea.

Additionally, the IRS compares your small business income year over year. A noticeable difference without supporting information to show why can make the government take action.

3. Taking Higher-than- Average Deductions

If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe. Outsourced accounting services and the appropriate tax preparation provider can help ensure you are claiming the right deductions for your business.

4.  Taking Large Charitable Deductions

Giving charitable contributions can be an excellent write-off as well as making you feel good about helping others. However, if your charitable deductions are disproportionately large compared to your income, it raises a major red flag with the IRS.

The IRS is extremely knowledgable with what the average donation is for businesses at your income level. Also, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you’ve donated a conservation or façade easement to a charity, chances are good that you’ll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

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6. Inflated Rental Property Expenses

Tax returns with what appears to be inflated rental expenses are frequently caught in the IRS net. Not knowing the difference between a deductible expense and one that must be capitalized over a number of years could result in a disaster in an audit. Hiring a local CPA can help your small business distinguish the differences.

Specifically, many do-it-yourself tax filers who are new to rental property owners don’t realize that some expenses can be deducted in full, while others need to be capitalized over several years. As an example, property repair expenses can generally be deducted, while property improvements need to be depreciated over a period of 27.5 years.

7. Home Office Deduction

It’s perfectly legitimate to claim a home office — but it has to meet the strictures of the Tax Code and the IRS’s guidance. With too many taxpayers attempting to claim their living room because they sometimes answer work-related e-mails in it, this is a red flag for auditors.

8. Overly rounded numbers

A procession of suspiciously even figures draws the eye. A certain amount of rounding is acceptable, but experts generally suggest going for the nearest dollar, rather than the nearest ten or hundred — it stretches the imagination to suggest that all of a taxpayer’s expenses are either $50 or $100. In these days of electronic receipts and computers that do all the calculations, if an exact figure is available, that’s the best bet. Outsourced accounting services can help your small business ensure that all your numbers are 100% accurate which will greatly ease the process come tax time.

9. Owning a Cash Business

It’s much easier for a business that deals in cash — think restaurants, bars, convenience stores and the like — to hide or misreport income, so the IRS is more likely to examine the return of an individual who owns one.

Final Thoughts

There are many reasons the IRS could choose to audit your small business tax returns. We highly suggest turning to outsourced accounting services as well as a professional small business tax preparer to ensure 100% accuracy in your returns. At the end of the day, if your returns are completely accurate and filed right you will have great peace of mind as a small business owner!

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Having a professional accountant on your side can make a huge difference for small businesses. Our professional accountants in Gilbert can provide 100% accurate data in real-time with just the click of a button. Additionally, our team provides professional certified tax preparers to ensure your taxes are filed accurately. Tax planning is a year-long effort- especially for small businesses with complicated regulations! Get started with our team TODAY!