Tax time is here, and it’s a chore that nobody enjoys. If you own your own business it’s especially challenging as you manage business expenses, personal income and various credits and donations. The IRS audits fewer than 1 percent of overall returns, but certain items in your return will make you more likely for a closer review.
Earlier we talked about common mistakes that trigger audits, such as mathematical errors on your tax forms themselves, such as a 1099 miscalculation. Besides human error, though, what you specifically file may influence if you receive an audit.
Income and write-off types
Accounting Today has compiled a list of red flags that draw extra IRS scrutiny. Summarizing the 12-point slideshow, key triggers include the type and amount of income you claim, and unusual expenses and credits.
In the income category, an unusually low salary draws attention, as does a significant change from the previous year—whether an increase or decrease. The article also points out that income above $200,000 and owners of cash businesses like restaurants are more likely targets.
As for expenses and write-offs, unusually high charitable donations are one common red flag. Other items to draw attention are home office deductions, suspiciously rounded numbers, and high entertainment expenses. Hobby loss claims are also more likely to draw extra attention.
Besides human error, the items listed all share a common trait: room for dishonesty. In flagging cash businesses and expense reporting, for example, the IRS is watching for areas where business owners are more likely to manipulate their numbers to reduce their taxes. Large changes in total income and rounded numbers are statistical anomalies, which also trigger closer review.
Keeping up with tax law
Accuracy and honesty matter, which isn’t to say that taxpayers shouldn’t take a close look at their tax options to make sure they aren’t overpaying. Taxes are highly complex, especially for business owners, which is why there are many specialists to help in the field. Keeping up with US tax law is a full-time job itself and it’s not expected that every business owner knows all of the details. If you need to prepare for an audit or to review your tax status, consulting with an experienced attorney can protect your business and free your time to focus on your profits.