Being a small business owner can be challenging. You have to invest in finding the right employees and balancing growth and quality. Besides, you must pay and file your taxes on time and report everything as required on your tax return.
Unfortunately, there are chances that you can get audited. Sometimes, these audits are random and other times, your tax return has something that got flagged for further scrutiny. Regardless, it is crucial to know some of the common causes of IRS audits and learn how to prevent them.
Below are some IRS audit triggers you shouldn’t overlook:
1. Misreported income
Your tax returns should account for all your annual incomes. Your Schedule C form will indicate your reported income when filing your taxes. Therefore the IRS will match the information on your reported income to your tax return. If they don’t match, it can trigger an audit. So, avoid rounding up, averaging, not reporting or reporting a higher-than-average income.
2. Inconsistent deductions
It is usual for small businesses to have deductions on their tax reports. Some deductions might include travel expenses, internet bills and home office deductions. However, any deductions not in line with your business model or inconsistent with your income can trigger an IRS audit.
3. Claiming business losses continuously
Claiming business losses every time you file your returns might trigger an IRS audit. It is not unusual for small businesses to experience losses. However, claiming yearly losses can make the IRS question the legitimacy of your business.
4. Misclassifying employees as independent contractors
Most small business owners tend to classify their employees as independent contractors to lower the cost of their business insurance, reduce labor costs and avoid paying specific small business taxes. So, if you hire an independent contractor, ensure you have all the vital documentation about what they do for your business.
Tax audits are every small business owner’s nightmare, so you must know and avoid the triggers. However, if you’re subjected to an audit, seeking legal guidance as soon as possible is wise.