Small businesses can be subject to audits randomly, but the IRS usually pays closer attention when specific red flags appear. Unfortunately, many owners don’t know these audit triggers and may struggle with preventing them. To provide guidance for entrepreneurs we’re breaking down how often small businesses are audited and what alerts the IRS – helping business owners stay prepared in any circumstance.
Common IRS Red Flags
Be Wary of Entertainment Spending
Though there are still deductions available for meals with potential or current clients, care should be taken when claiming other entertainment expenses. As the government eliminated business-related deduction allowances in 2017, all costs associated with such activities will have to come out of pocket. However, if you are present at a client meal and order reasonably priced food and beverages – 50% may potentially qualify as deductible. It’s wise to tread carefully when it comes to leisure events involving your business contacts lest an audit ensues!
Be Careful with Deductions
Business owners invest a substantial amount of time and effort into their companies to ensure success, so they should certainly take advantage of all applicable deductions. However, when it comes to accessing these benefits, caution is key. The IRS employs Discriminate Income Function screening – if your business makes significantly more deductions than those in the same industry typically do, you may be subject to an inquiry from the agency itself!
It’s easy to become tempted by the potential savings when it comes to miscellaneous deductions. But be warned that careless decision-making in this area could come with serious IRS consequences! To stay on the safe side, always make sure your business expenses are ordinary and necessary for your industry—particularly vehicle mileage or travel related costs which often face extra scrutiny from tax authorities. If you’re new to managing a small organization, expert financial advice is indispensable – don’t hesitate to seek out help so you can get off on the right foot as far as taxes go.
Always File on Time
The IRS is always keeping an eye out for any inconsistencies that could indicate a potential issue with your business taxes. Don’t take the risk of their unwanted scrutiny and ensure you file on time – whether electronically or via paper! To avoid exception, start filing now to guarantee timely compliance and prevent those costly penalty fees. If delays occur unexpectedly, be sure to request an extension before it’s too late and keep electronic filing in mind as it reduces errors significantly.
With increased accountability and professional competence, small businesses that incorporate often find themselves less likely to be audited by the IRS than Schedule C income tax filers who are self-employed. According to one reliable legal source, this is because incorporation can demonstrate a higher level of financial responsibility which helps reduce suspicion for underreported incomes or unearned deductions – an issue frequently associated with smaller operations.
Financially savvy business owners and entrepreneurs are turning to corporations or LLCs for multiple advantages. Aside from reducing the risk of audit, incorporation delivers substantial tax benefits and safeguards personal assets while enhancing eligibility for loans. Incorporating is an ideal strategy if you value financial security – so why wait?
Be Cautious of Sudden Charity
Donating to charity is a great way of giving back, but if you give too much at once the IRS may become suspicious. Gradual donations spread over time are more likely to be taken as genuine support rather than tax evasion strategies–plus it gives your charitable cause benefits that last!
If Paying in Cash, Record Every Transaction in Detail
Companies engaging in cash transactions, such as purchasing large items like vehicles and equipment, should keep careful records to ensure they are up-to-date. Consider using a business credit or debit card instead for easier record keeping – not only can you track your expenses more accurately, but it could save time during the filing process if ever required by authorities.
Always Report ALL Taxable Income
Keeping accurate records of income is a key component to any successful business, and the IRS has high expectations when it comes time to file taxes. Make sure each taxable dollar earned in the US during tax season is properly reported; not doing so can easily lead to an audit should suspicion arise. Furthermore, businesses utilizing digital currency may be subject to even more intense scrutiny by government agencies – think carefully before incorporating such into your operations!
Provide Reasonable Salaries
As a small business owner, maintaining reasonable employee salaries is key. The IRS pays particular attention to overly large remuneration for shareholders and executives alike; accordingly, with enlarged incomes comes amplified audit risk – something that must be taken into careful consideration when navigating salary decisions.
At UptoDate Bookkeeping, we are dedicated to equipping small businesses with the tools they need for success. Our team of experienced professionals use their knowledge and skill to provide tailored solutions that guarantee accurate records and balanced accounts every time. Get started on your business growth journey today by scheduling a call or chat session with one of our bookkeeping experts!