What prompts an IRS tax audit of a small business?

What prompts an IRS tax audit of a small business?

As a small business owner, you feel you are doing everything right. You keep comprehensive records, pay taxes and are responsible overall. Yet something has piqued the IRS’ interest in you. They tell you they are planning an audit of your business soon.

You are understandably concerned, maybe surprised and worried as well. You hope you are not going to be burdened with additional tax interest and penalties that set you back financially. You also don’t want the reputation you built up so carefully to be tarnished by a messy tax dispute.

There are a few reasons why your business taxes might be slated for a closer review by the IRS. It doesn’t always mean you or anyone you employ did anything wrong. But something caught their attention and needs to be clarified to their satisfaction.

What kinds of warning signs will draw the IRS’ notice?

Steer clear of these situations:

  • Categorize your employees correctly. If you say that someone working for you is an independent contractor, be sure that they actually fit that description.
  • Be cautious if you have a lot of cash transactions. Some businesses do, like barbershops and restaurants. Just be certain that you keep records that are complete and accurate.
  • If you repeatedly claim annual losses, the IRS may take notice. Everything needs to be thoroughly and regularly documented.
  • Going overboard when you are claiming deductions is another hazard. Valid deductions must be “necessary” and “ordinary” to be considered acceptable. Taking deductions right and left that are a stretch could bring about IRS scrutiny.
  • Reporting income incorrectly is a pitfall to avoid. That means watching out for errors such as partially reporting them.

Ask a professional when you are perplexed

Tax regulations can be complicated. They sometimes change, too. Instead of trying to figure them out yourself and risk making a consequential mistake, have someone who is well-versed in tax matters answer your questions before you file.

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