4 Red Flags That Could Trigger an IRS Small Business Audit

Many people feel stressed out and anxious during tax season. Some are worried that they might owe money or that they haven’t done their taxes right. Others worry about whether or not they will get a notice that says they are tagged for an IRS small business audit.

The truth is that most people can relax. Even if you did make a mistake, most aren’t actually severe enough to trigger an IRS small business audit.

However, as you do your taxes – whether you do it yourself or if you hire a professional Mount Pleasant NC CPA – pay attention to these 4 red flags that may lead to an IRS audit, or if not an audit, then a letter from the IRS that states you made a mistake or forgot something and that you owe them money.

1. Cash transactions

Businesses that mostly deal in cash are big targets for the IRS. Why? This is because cash income is more difficult to verify. Due to this, your small business may simply be more prone to IRS audits if you mainly process cash transactions.

Large cash transactions are another red flag that can trigger an audit. Purchasing new company vehicles, business equipment, or other investments with cash usually draws the IRS’ attention. If you can, try to pay for these business expenses using debit or credit cards to avoid additional IRS scrutiny.

2. Failing to report taxable income

Late filings are one thing – complete failure to report is another. A failure to report your payroll taxes is a really big red flag for the IRS.

Not reporting your own personal income is also another red flag. The IRS wants to make sure that you aren’t withholding income in your calculations and reports. If you fail to report your payroll taxes or personal income, you can expect to hear from the agency at one point.

3. Donating large sums to charity

Of course, donating to charity is never a bad thing. Unfortunately, the IRS has a skeptical view of small businesses donating to charity. For instance, if your business suddenly starts to increase the amount of money donated in a year, the IRS may want to ensure that these donations aren’t an attempt to abuse the tax code.

To avoid scrutiny and an IRS small business audit, try to maintain a steady level of donations each year. By slowly scaling up your donation efforts, the IRS will have less reason to suspect that your donations are an attempt to avoid paying small business taxes.

4. Rounded numbers.

While it’s entirely possible that your tax return is accurately filled with round numbers, these clean intervals will make the IRS do a double-take. Even numbers are quite rare in finance and they can attract a lot of suspicions. While rounded numbers may seem convenient, the IRS will get involved if they suspect that a business isn’t using exact numbers to denote expenses and earnings for tax purposes.

The best way to avoid this red flag is to be as precise as possible. Always work in decimals unless otherwise stated in your tax filings. And if you must round, try to round to the nearest dollar instead of the nearest hundred.

The Bottom Line

Filing taxes is no simple process. Not only is the filing process complex, but the rules can also change from one year to the next, making it an even more confusing task. Fortunately, you don’t need to let tax management take up too much of your busy schedule.

When you need to free yourself from the struggles of tax management, Susan Gordon Lee can help. As a reputable Mt Pleasant North Carolina Accountant, Susan doesn’t just help you save valuable time, but she can also help you stay up-to-date with ever-changing regulations and avoid IRS audits and costly penalties.