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What Catches the IRS’s Eye? Avoiding Common Audit Pitfalls

  • Writer: Brian R. Schobel, CPA
    Brian R. Schobel, CPA
  • Apr 2
  • 2 min read

Dealing with the IRS can be daunting, and the word 'audit' strikes fear in the hearts of many business owners. However, understanding what triggers an IRS audit and how to steer clear of these triggers can keep you off the IRS's radar and reduce your stress levels significantly. Here’s how to keep your business audit-proof:

  1. Report All Income: Don't make the mistake of underreporting your income. The IRS has a sophisticated system that matches the numbers you report with those from other sources (like your 1099s and W-2s). Ensure every dollar is accounted for.

  2. Be Accurate with Deductions: While deductions are a legitimate way to reduce your tax liability, overstating your deductions is a surefire way to attract unwanted attention. Only claim deductions for which you have clear documentation, and ensure they're reasonable, given your income.

  3. Don’t Mix Personal and Business Expenses: This is a common pitfall for many small business owners. Keep a strict separation of your personal and business finances. Use separate bank accounts and credit cards and diligently categorize every expense.

  4. Be Cautious with Home Office Deductions: While legitimate, the IRS frequently scrutinizes the home office deduction. To qualify, the space must be used regularly and exclusively for business. Be prepared to substantiate your claim with detailed records.

  5. Avoid Too Many Round Numbers: If your expense reports look a bit too tidy, it might raise eyebrows. Round numbers on deductions can appear as if they were made up rather than calculated precisely.

  6. File on Time: This might seem obvious, but filing late or inconsistent tax returns can be a red flag for the IRS. Maintain a regular and timely filing schedule to avoid drawing unnecessary attention.

  7. Understand Your Industry Norms: The IRS uses automated tools to compare expense ratios across similar businesses. If your deductions or expenses look abnormal compared to others in your sector, it may trigger an audit.

  8. Use Professional Help: Taxes can be complex, and the cost of hiring a tax professional often pays for itself in the tax savings and avoidance of legal complications. A tax professional can help ensure that you are taking advantage of all available deductions while staying within legal boundaries.

By following these guidelines, you can minimize the risk of an IRS audit and navigate your financial year with greater peace of mind. Remember, staying informed and meticulous in your record-keeping is the best defense against any tax issues.

 
 
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