Your personal and business operations are too precious to be threatened by an IRS audit. Today, we wanted to talk about the biggest IRS audit triggers for small businesses.
Mistakes
Though there are few audits triggered by mathematics mistakes, the IRS has a computer trigger called the Discriminant Information Function (DIF) that scans tax returns and looks for certain things like duplicate information, and other mistakes. For example, a person or business with $100,000 in income likely won’t have $60,000 in charitable deductions, and DIF can catch that.
Most mistakes that individuals and businesses make most often include writing Social Security and Tax Identification numbers incorrectly.
Luckily, a good second look at your tax forms once they’ve been filled out can save you a lot of headaches.
Home Office & Self-Employment
One of the biggest audit triggers is the misrepresentation of home office items and self-employment expenses or income.
Home office and home business deductions were difficult to navigate before the pandemic forced a lot of people to work remotely. There are a lot of rules you must follow for your expenses, equipment, and office space.
It’s also important to note that your office and home business equipment must be used exclusively for your business for them to qualify for the deduction.
Because of the complexity, the IRS often sees the home office section of the tax return as an opportunity for audit. If you plan to take advantage of these deductions for your business, you should also be prepared to prove that these items (from cars to tablets to other materials and utilities) were used solely for business purposes.
Missing Income
Gig workers are more prevalent than ever, which means the IRS is looking for unreported freelance and independent contractor income, either from your business payment perspective or the freelancer’s reporting.
High Deductions
Claiming deductions that seem disproportionate to your or your business’s income is another big red flag for the IRS.
Claiming Year-Over-Year Losses
Another of the biggest IRS audit triggers is if you report losses every year. Business losses lower your taxable income, which in turn reduces the tax liability for your company. Many taxpayers are losing money every year but failing to report profits for your business for an extended number of years will likely draw the IRS’s attention, and not in a good way.
What Does an Audit Cover?
The IRs can only look back so far in your tax record, so let’s talk about how long you should keep your tax records just in case you do happen to get audited.
The IRS has a three-year window to audit you, and you should keep everything from those three years in case you ever need to show those records. The farthest back the IRS can dig is six years.
E-File Your Taxes to Minimize Audit Potential
eFile360 was founded as a way to help business owners and other professionals file information return forms. There are a lot of benefits:
- Save time and money when filing one or hundreds of information return forms
- Data is securely saved for future use, so you can reuse Filer and Recipient information year after year
- Process any number of forms seamlessly and economically
- There’s no need to invest in expensive software
- You’ll enjoy lower administrative and IT costs associated with year-end information return processing
Our digital solutions can help keep the IRS from questioning your business taxes. Sign up for a free eFile360 account.