No one wants to have their small business
audited by the IRS.
It’s never a good experience.
The IRS have to audit businesses they
believe might be avoiding paying taxes.
They review their income and expenses to
make that determination.
They’re looking for income that might be
unreported, under-reported, or overstated
Avoid getting audited by the IRS by paying
attention to these top 10 things.
1. CLAIMING A LOSS YEAR AFTER
Claiming a loss year after year will get the IRS
They will check to see if you’re a
legitimate business and they will want to know
if you’re claiming expenses that you shouldn’t.
Many businesses go on for a long period
time experiencing losses.
Just make sure that you’re claiming
2. LARGE DEDUCTIONS:
When it comes to deductions, don’t fudge the
The IRS has a formula that it uses to
determine how what the deduction levels should
be based on income.
Business Entertainment expenses should be in
relation to your business. Not for
personal expenses for taking your friends and
family on a trip. The IRS looks for
excessive claims of business entertainment
expenses. Protect yourself by keeping
records for each claim, what was discusssed and
who was in attendance. Also, keep receipts
for expenses greater than $75.00.
Be sure that you can document every
3. BUSINESS USE OF VEHICLE:
If you do not have a vehicle specifically
designated for business use only do not claim
100 percent business use of the vehicle.
It is a red flag if you claim 100 percent
use of a vehicle when it is the only vehicle you
Obviously a portion of the use will be
for personal reasons if you only have one
You should document the portion of the
vehicle that is used for business by keeping a
log every trip.
4. LATE FILING:
Don’t consistently file late.
It’s a red flag.
File on time.
If you have to file late, ask for an
Be sure to pay taxes when they are due,
this includes any interests or penalties.
HIGHER THAN AVERAGE INCOME:
Businesses with higher than average income will
get more scrutiny from the IRS.
That has always been true and will
continue to be true.
So, as your busniess grow and generate
higher income be ready for more scrutiny.
6. CASH BUSINESS:
Businesses that operate on a cash only basis
will come under more scrutiny from the IRS
because they may be perceived to under report
their true taxable income.
If possible use other methods to accept
The IRS gives more scrutiny to small business
owners who file a Schedule C.
The Schedule C lets you take deductions
that lower your taxable income.
However, If you have legitimate
deductions, file the Schedule C.
8. HIGH SALARIES:
high salaries paid to employees who are
shareholders will bring scrutiny from the IRS.
What is unreasonable is unknown.
However, you should look at other
companies in your industry to determine what the
average salary is.
9. CHARITABLE CONTRIBUTIONS:
contributions to charitable organizations could
be seen as an attempt to avoid paying taxes.
Hence, the IRS will scrutinize large
charitable contributions closely.
Make sure that your charitable
contributions are reasonable and not done solely
to avoid paying taxes.
10. NOT INCORPORATED:
being incorporated could bring extra scrutiny
from the IRS.
Because your business is not setup and
operating as a separate entity, there is a
chance that you may not be separating your
business expenses from your personal expenses as
a sole proprietor.
This is what brings attention from the
You should incorporate your business.
You can still get the lower personal tax
rate by registering as a “S” Corporation.