IRS AUDIT PREVENTION TIPS

WHAT DOES THE IRS LOOK FOR?

AUDIT RED FLAGS AND TRIGGER POINTS PROVIDING IRS AUDIT PREVENTION TIPS

The following is a list of some of the things the IRS looks for that may trigger an audit:

• Businesses that deal with large amounts of cash such as: restaurants, motels and inns, gas stations, and small stores for just a few examples. The IRS looks for “hidden” income, so make sure you keep detailed records of income and expenses.
• Industries with a history of poor tax compliance such as: Air charter companies, Cab companies, Gas retailers, Music industry businesses, Mortuaries, and Bed and breakfast inns for just a few examples.
• Payroll tax deductions that don’t match salaries and payroll tax returns. Be careful in keeping good records.
• Matching facts and figures. It’s not just your own figures, but also anyone you are doing business with. The IRS cross-checks amounts that are reported by other business taxpayers and government agencies with amounts reported on your return. This is a commonly neglected area that requires close attention. The IRS also shares information it has with state taxing agencies.
• If a company with which you do business gets audited, this could also put the focus on your own business. Once again, showing the importance of keeping accurate records.
• One popular audit area with the IRS has always been meals and entertainment expenses. Make sure they serve a business purpose and you have receipts to back up your deductions.
• If you have bad debt expenses claimed by a cash basis filing, this can draw the attention of the IRS.
• If you have repair and maintenance expenses on equipment, the IRS may try to find assets that should be depreciated.

One major issue to be aware of when operating as a sole proprietorship in this current economic environment is as follows:

As of January 2010 the word was out that as a result of internal audits by the IRS, an annual revenue collection shortfall of $300 billion dollars per year has been found. The IRS believes that the shortfall is not coming from the large corporations, but from the small businesses. They are primarily targeting the sole proprietor — approximately 67% of all small businesses — who file taxes on a 1040 Schedule C return.

If this is you, you would be wise to consider converting to one of the forms of corporate entity.

See Business Structures

By IRS statistics, if you operate your business as a sole proprietorship, you are 300% more likely to be audited by the IRS, compared to a corporation or LLC.

See IRS Study on Tax Gap

 IRS Audit Prevention