“Red Flags” that may Trigger a Tax Audit

Filing Late In addition to penalty fees, filing late can trigger unwanted attention from the IRS. It’s never too early to start the process of ensuring that your financial books are accurate for tax filings.

Calculation Errors & Rounded Numbers Mistakes and rounded numbers indicate incompetency, laziness or even dishonesty. Any of these are reasons to issue an audit.

Failure to Report All Taxable Income It is imperative for a business to keep their financial books organized throughout the year ensuring that all income transactions are accounted for and properly documented – otherwise keep checking your mail for a tax audit notice!

Cash Transactions These are harder for the IRS to track and thus can warrant unwarranted scrutiny. We recommend using credit or debit cards instead of cash, otherwise ensure that precise, detailed records are kept when using cash.

Schedule C Filings If you are a Sole Proprietor then you must be very careful to ensure that all deductions are accurate, not inflated, and that good records are kept verifying these deductions. You may want to consider making your business a Corporation to avoid the higher risk of Sole Proprietor audits and to possibly take advantage of certain tax savings.

Excessive Expenses This is another common audit trigger – particularly travel and meal expenses. Be sure to separate your personal and business expenses carefully.

Excessive Deductions Too many deductions, large deductions and certain types of deductions such as vehicle usage and large charitable donations can trigger an audit.

Home Office Deductions Tax Returns that include a deduction for a home office are a prime IRS target. The home office deduction rules are very strict and you must be prepared to prove that you truly use your office for business and business only.

Income Disparities If you report less income than is typical for your profession or industry, the IRS may suspect that you are hiding income and audit your return. Also, if it doesn’t match the totals indicated on your W-2’s or 1099’s, or changes dramatically from year to year, the IRS may suspect that you aren’t reposting it correctly.

Misclassified Workers If your business uses contractors make sure that they qualify for independent contractor status, otherwise the IRS may determine that they are employees and stick you with a big bill for back payroll taxes and penalties.

Multiple Net Losses Year Over Year A business should be engaged to earn money, according to the IRS, and must earn a profit three out of five years, otherwise the IRS may consider it a hobby and you may end up owing back taxes.