Top IRS Audit Triggers for Small Businesses

An IRS audit: few things strike as much terror in the hearts of small business owners than this simple phrase. You try to do your taxes accurately and on time, or maybe you hand it all over to an accountant. Still, with today’s complicated tax codes, are any of us really confident that we completed our small business taxes correctly? Though mistakes can happen, there are a few areas that are the more likely than others to trigger a visit from the IRS auditing staff. Below are five such triggers you’ll want to avoid if at all possible when preparing your taxes next tax season.

Simple errors. Simple errors, like writing your Social Security number on your return incorrectly can bring your return to the attention of the IRS auditors. Likewise, mathematical errors on your return, especially in totaling your income, can bring on an audit.

High income. Are you lucky enough to report more than $1 million in earnings? Prepare for an audit. According to the IRS, an average of 8.5 percent of the people in this income bracket will be audited.

Home office deduction. If you truly use your home office exclusively for business, go ahead and take the deduction, But, be prepared to prove it. This often-misused deduction can also trigger an IRS audit. So, if your office is also your guest bedroom or your craft room, maybe you want to rethink taking this deduction.

Reporting incorrect income. Did you remember to report all of your income? The IRS gets a copy of all of the W-2 and 1099 forms that the people who pay you send to you. The IRS compares these documents on a random basis to income reported on tax returns. If there’s a discrepancy, expect an audit. Because of this, if you receive an inaccurate tax document, be sure to get it corrected before you file your taxes.

Certain industries. Those who work in some industries, primarily those that deal in cash, like beauty salons, home contracting and restaurants, are more likely to be audited than those who work in other types of jobs. Also, workers in industries with a history of fraudulent tax returns, like car salesmen and tax preparers, are more likely to get audited.

Taxes, unfortunately, are a fact of life. Knowing which areas of your return is likely to draw the attention of the IRS can help you prepare for next year and, with luck, steer clear of that IRS scrutiny.