If your small business receives news that it’s scheduled to be audited by the IRS, you’re likely to become slightly distressed. Even if you have triple checked your tax return for errors, are able to defend every deduction you claimed and back up your income.
According to Fox Small Business, “There’s no way to determine exactly what brings about an audit, but there common red flags and IRS data that show the frequency of audits performed in 2012 by return type.”
IRS tax data shows that of 143 million individual tax returns that were filed, only 1 percent were audited. However, when it comes to business returns, the odds of being audited increase significantly. Not surprisingly, the data shows that the audit risk rises depending on how much income your business generates.
Below is an example from the data on tax audits:
“If your Schedule C lists gross receipts under $25,000, your odds of being audited are 1.2 percent, just a little bit higher than those for individual returns without business income. The odds double to 2.4 percent when gross receipts exceed $25,000 up to $100,000. Once small business owners bring in more than $100,000 and up to $1 million in gross revenue, their odds of landing in the hot seat increase by 3.6 percent.”
And then there was this part of the data:
If a business shows more than $1 million in sales, their chance of being audited rises to 12.1 percent. When referring to corporations, last year, 17.8 percent of large corporations were audited and once assets crossed over $20 billion, a business can pretty much be guaranteed to be audited. According to Entrepreneur, in 2012, 416 out of 446 corporations were audited, that’s 93 percent.
So the next question is, what are the reasons your small business could be audited? And what does the IRS look for?
A writer for Taxpertise.com put together a list of a few things that could likely draw attention to your small business’ tax return.
1. Your income to 1099 totals are mismatched. If you provide services to clients and receive Form 1099 declaring your income for the year, know that the IRS gets a copy of each 1099 you receive. If the total sales shown on Schedule C is less than the total of all 1099s that were issued, the IRS will come knocking.
2. Exceeding industry standards. The IRS has a listing of average expenses to income for each industry classification. If your expenses are significantly higher, they will select you for audit to find out why. But if you have documentation and proof of expenses that show they are ordinary and necessary business expenses, then you have nothing to worry about.
3. Flagged expense items. Big numbers in categories like travel, meals, entertainment, and vehicle expense can all raise eyebrows. Know the rules and be sure to keep all supporting documentation to prove the business intent of these expenses.
4. Self-prepared returns. There are more than 75,000 pages of tax code. Even tax professionals specialize in certain fields and refuse to take on tax returns or certain types of transactions because of the complexity involved. Once you become self-employed, the ante goes up; there is so much more to know about the tax code, more than can be dealt with through a Q & A session with tax preparation software designed for the individual filer. The IRS knows that there will likely be a lot of mistakes on self-prepared income tax returns that include a Schedule C. Therefore, many of those are pulled for examination.
When it comes to taxes, honesty is the best policy. Be truthful when filing your taxes and remember that taxes aren’t a DIY project for small business owners. Talk to an accountant or tax specialist and be sure to get expert advice on all business write offs. You’ll save more money and you’ll be able to remain stress free in the chance of an audit.
To learn more about the top 5 ways to avoid a tax audit, click here.
By: Lauren Rockwell, a business writer and works on the marketing staff at Liberty Capital Group, Inc. She writes about the latest business trends and industry from tax laws to the latest financial trends. Her blogs are intended to offer accurate and concise advice to readers.
Source: Fox Small Business: FOXBusiness: Tax Audits, Bonnie Lee, 1.31.14
Source:Consumerist: TaxMan: IRS Tax Audits, Chris Morran, 1.28.14