4 Ways to Incite an IRS Audit on Your Business
An IRS audit is almost never desirable – for you personally, or for your business. While it should not necessarily be feared, it does require a significant amount of time and effort on your part (and on the part of the IRS for that matter), so it is something that you generally would probably wish to avoid. The IRS typically audits approximately 1% of all tax returns, a relatively small overall percentage. Have you ever wondered just how the IRS determines who is “audit-worthy”? They use a system called the discriminate information function (DIF) a system that scores tax returns based on a comparison with other returns with similar information (job, income). If a return looks noticeably different from peer returns, then it may be flagged for an audit. Here are a few examples of instances that may incite an audit on your business:
1. Discrepancies on reported income: One of the biggest things that the IRS is looking for is evidence that you or your business has not been truthful about your income levels. For example, if your business handles large amounts of cash, the IRS may think that you are not reporting all of the cash and instead pocketing some of it. To avoid this problem – keep detailed records of ALL income and report all income to IRS.
2. Worker Classifications: If your business employs many “independent contractors”, expect some extra scrutiny from the IRS. The suspicion is that independent contractors may actually be employees of your company and that you should be paying their employment taxes. It actually costs a business 30% less to pay independent contractors than employees, so the IRS will likely be continuing to focus whether businesses are correctly identifying their workers.
3. Overseas Accounts: The IRS continues to be watching for individuals or companies that seem to move money around, particularly if funds are moved internationally. The IRS will focus on offshore transactions for all businesses, large and small. They are looking for instances where income is moved out of the US to keep that income from being taxed.
4. Claiming business related expenses that are social in nature: Again, this continues to be a red flag to the IRS. Reporting the use of company cars for personal use, indicating that social dinners are business expenses tend to draw the attention of the IRS and may put you at an increased risk of an audit.
One way to work proactively to prevent an audit is to partner with a tax firm that can review your business’ practices and tax documentation and help you make slight changes to your business practices that minimize your audit risk.
Success Tax Relief has been working with clients for over 30 years on routine tax preparation and planning and audit representation when needed. Our trained professionals know what incites an audit as well as what kind of documentation is necessary to provide if an audit has been requested. Give us a call at 1-877-958-6638 and we can provide a quick and easy consultation and let you know your audit risk level. Do not roll the dice another year – call Success Tax Relief now!