An IRS audit can be intimidating for small business owners. While the chances of being audited are relatively low, it's important to be aware of the common triggers that can increase the likelihood of an audit. Although IRS audits on small businesses are not frequent, there has been a notable escalation in their activities in recent years. Congress's passing of the Inflation Reduction Act in August 2022 led to an $80 billion fund for the IRS, $45 billion of which is dedicated to enforcement. The risks of audits may be reduced, but complete elimination is impossible. Some audits are circumstantial while others are due to errors or omissions by the taxpayer. Are you aware of these IRS audit triggers? By understanding these triggers and taking proactive steps to avoid them, you can minimize the risk and ensure smooth tax compliance. In this blog post, we will discuss six common triggers that can often lead to an IRS audit: Failing to Report Income Businesses must report all forms of income, regardless of how minor some may seem. This includes primary business income and income received from other sources, such as renting out office space, freelancing services, interest from business savings accounts, or even bartering exchanges of goods or services. Whether deliberate or due to oversight, income under-reporting is a key audit trigger. The IRS cross-checks information on the 1099 forms sent to your business with that on your tax return. Any discrepancies could raise a flag for an audit. Additionally, with gig work or side hustles becoming more prevalent, the IRS is taking measures to maintain records of personal earnings. Significant Discrepancies in Reported Income Significant discrepancies in reported income can also catch the attention of the IRS and trigger an audit. If your reported income significantly deviates from industry norms or previous years' income, it may raise suspicion. To avoid this trigger, it's important to maintain accurate financial records …
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