10 Red Flags That Could Earn Your Small Business an Audit

 If you receive a letter from the IRS remember that this does not mean they are automatically going to audit you. They could be looking for clarification or additional information. Once you receive a formal audit figure out what part of your returns is being audited. Only provide the specific information that the IRS requests to prevent broadening the audit. Make sure you are polite and quick to respond. With that being said, here are 10 red flags for the IRS that are in no particular order.

1. Claiming Business Deductions for Personal Expenses: Keep detailed books on exactly what is business related and what is personal. Higher than average deductions can also be a red flag for the IRS to audit you.
2. Math Errors: Having math errors can cause the IRS to look more closely at your return. Make sure your receipts add up to your 1099-K.
3. Claiming Fair Market Value for Real Estate: Claiming incorrect fair market value on your real estate can pique the interest of the IRS. Especially if you claim lower than normal fair market value.
4. A Sole Proprietorship with a Net Loss: Since there is commingling of funds in a sole proprietorship it is unlikely to have multiple years of net loss. The IRS tends not to audit startups in their first year. Though having the majority of your first 5 years in the red will throw some red flags.
5. Cash Transactions: Since banks will turn into the IRS your credit card transactions the IRS has a hidden algorithm to determine about how much cash sales your business should have had.
6. You’re Self Employed or Work Exclusively in Your Own Business
7. Claiming 100% Business Use of a Vehicle: If you plan to claim the vehicle for business use keep detailed mile logs of when and where the car was used for business means.
8. Shifting Income to Tax Exempt Organizations: Donating large amounts of money to charities to avoid taxes is considered tax abuse.
9. Consistent Late Filing: Consistently filing and paying your taxes late will draw unwanted attention from the IRS. If you will not be able to make a deadline always file for an extension.
10. Taking an Early Payout from Your 401K or IRA: The IRS finds that almost 40% of people who take early payouts file their returns incorrectly. If you take an early payout from your Roth, expect that you may be audited.