Flags That May Cause the IRS to Audit Your BusinessEditor
As the saying goes, “There are two certainties in life; death and taxes.” Both of those subjects’ cause feelings of anxiety and fear. Being a blog about business, we’ll attempt to tackle the latter of the two topics…tax audits. As a business owner, you are hopefully keeping good records and have hired a reputable accountant and bookkeeper. Whether you get an audit or not, this can make your life much easier.
It’s important to know what you can claim and what flags go up for the IRS to want to investigate your business further. The IRS audited less than 1% of all taxpayers in 2014 due to less auditors being on staff. But to err on the side of caution, here are some items that tend to alert the IRS and spur audits.
Home office deductions: Nowadays, it’s not uncommon to have a home-based business, or be a home-based employee. This means that you can claim a portion of your home expenses at tax time. However, you MUST have a space in your home that’s solely for business use. Though, if a portion of that room is used as office space you can only claim only that particular area.
Excessive charity donations: Giving to charity is a wonderful thing to do. It’s a bonus to be able to claim it on our taxes. Sadly, some people exaggerate the amounts given. The IRS, aware of this abuse, take a longer look at excessive donation amounts. If you’re being honest, an audit is still a possibility, but have nothing to fear if your accounts of giving are accurate and true. An audit may also depend on what charity you’re giving to. Check on the IRS website to be sure the organization you’re donating to is on their “Exempt Organization Select Check” section. You can also request to see the organizations IRS letter that confirms it as tax-exempt. ALWAYS get receipts, especially when giving cash donations as well as household good and personal items.
Meals, travel and entertainment: This is an area many people try to take advantage of when filing their taxes. Going to dinner with friends and claiming that receipt because you mentioned your business does not qualify! If you, however, had a temporary (under a year) work assignment away from home, you can claim those deductions. If you are working indefinitely in another area other than where you reside, you cannot claim those deductions.
Deductions you can claim include:
- Airfare, train, bus, or car as well as transportation to and from business related locations (keep your tickets and receipts)
- If you’re using your own car, you can use vehicle expenses or mileage rates and tolls and parking fees. You may claim rental car expenses for the portion that you use it for the business.
- Meals and lodging
- Dry cleaning and laundry
- Business phone calls as well as fax submissions or other communication expenses
- Tips for services at any of the above that relate to the business
100% vehicle use for business: If you claim that you are using your personal vehicle 100% of the time for business, this is a flag!
Primary cash business: Businesses that accept cash more than other methods of payment are more vulnerable to scrutiny. It is easier for these businesses to skim off the top of collected payments making this a flag.
Not reporting all accounts, particularly foreign: This is pretty self-explanatory and common sense.
Be sure you have a reputable accountant: First and foremost, be sure they have a license and insurance. If they make a mistake on your filing, you want to be sure you are covered. Next, find out the extent of their experience in business taxes. Perhaps your uncle Bob is great with numbers and has done your taxes in the past. Nonetheless, he likely doesn’t have experience in changing tax laws and business taxes in particular.
A good accountant can also help you when it comes to giving advice on grants, tax relief, etc. This can help you find more capital for your business. There are many ways your accountant can be helping you financially that you may not be aware of.
Do your research online to find someone that will be a good fit for you. Taking recommendations from business associates is a great start. Don’t be afraid to ask lots of questions regarding their charges and what their qualifications are. You can even ask for references. This is no different than hiring a new employee.
Some additional info: Typically, individuals with more than $200,000 total positive income had a greater chance of receiving that letter from the IRS. As for businesses, those that were audited at the highest rate are ones that are Sole Proprietorship or regular C corporations. Businesses that were taxed as partnerships, LLC’s, or S corporations had lower incidences of being called on by the IRS.
*Check with your accountant and/or the IRS website for the most accurate and up to date answers to your questions.