IRS Audit Triggers: The Warning Signs That May Lead to an Audit

What you’ll discover:

Legitimate Errors
Schedule C Losses on an Ongoing Basis
Business Deductions and Excessive Costs
Inability to Pay

The dread of an audit may prevent you from accepting valid company deductions. The IRS is concerned about every company owner, but simple deductions will not inevitably result in an audit. Additional triggers must appear in order for the IRS to flag your tax return. The IRS Restructuring and Reform Act was meant to safeguard taxpayers and to prevent deductions from becoming such a regular trigger. There are, however, certain things you may take to assist avoid the IRS from taking notice. These are some red signs to look out for.

Legitimate Errors

The existing tax filing method is not user-friendly, and errors are common. The IRS may flag your account just because you entered your social security number incorrectly or made a mathematical error. In other situations, the IRS will merely concentrate on this mistake and will not conduct a thorough audit. But, if additional triggers are present, the IRS may need a thorough assessment of your organization to verify that nothing else has been misstated. Check your tax forms again to ensure that the information is right. Having someone person you trust or a software tool complete the check for you might help you avoid an IRS audit.

Schedule C Losses on an Ongoing Basis

When you manage a solo proprietorship or partnership, you may occasionally deduct your net losses or save them for the next year’s deductions. The IRS will take notice if you continue to declare net losses without net earnings. The IRS generally enables you to claim net losses three out of every five years. It doesn’t mean they won’t come inspect your firm before then, but if you have more than five straight years of schedule C losses, you’ll face an IRS audit and maybe the loss of your business deductions, among other penalties. If you can’t earn a profit, the IRS will normally classify your firm as a hobby rather than a business.

Business Deductions and Excessive Costs

In general, company deductions and costs will not get you highlighted, but excessive spending for luxury products or things plainly unrelated to your firm will. The IRS pays close attention to travel and food costs, as well as luxury goods such as TVs, workout equipment, gaming consoles, and other comparable products. Frequently, business owners attempt to utilize corporate cost claims to offset their own personal spending, which may be disastrous for their company. Save your receipts and record why they were legitimate business costs to defend yourself. If you are entertaining a client, put the customer’s name as well as the purpose on the receipt. Otherwise, when it comes time for an audit, you may not recall why it was relevant to your firm. This may be pretty stressful in and of itself.

Inability to Pay

The IRS makes every effort to monitor and cross-reference all accounts received. Even if you do not report income, your customer may do so, and the IRS may notice that you did not. This raises a red signal, especially if the amount surpasses $300. Moreover, if you fail to pay your taxes at all, the IRS will most likely come after you. Similarly, if you do not pay enough on your anticipated taxes, the IRS may conduct an audit. In general, your company must pay at least 90% of all expected quarterly taxes before the end of the year. Otherwise, you’ll face a fine and potentially an audit. Businesses are seldom inspected solely for failing to make quarterly payments (as long as Form 2210 is completed), although even this is not a guarantee.

Being audited by the IRS might be terrifying, but if you know how to avoid the red flags, you can dramatically lower your chances. Be careful while filing your taxes and preserve precise records. While you can’t totally prevent the possibility of an IRS audit, taking these safeguards will significantly lower your chances of being picked out.