Common IRS Audit Triggers for Small Businesses: How to Avoid Them

As a small business owner, the word 'audit' can be a source of anxiety. However, understanding the common triggers for an IRS audit and taking proactive steps can significantly reduce the likelihood of facing one. This article explores the factors that could lead to an IRS audit for small and medium-sized businesses (SMBs) and provides practical tips on how to avoid them.

Discrepancies in Reported Income

One of the most common triggers for an IRS audit is discrepancies in reported income. The IRS cross-references your reported income with the 1099s and W-2s they receive from other businesses and individuals. If there's a mismatch, it could trigger an audit. To avoid this, ensure that your reported income matches the income your clients, customers, and employees reported.

Excessive Deductions

While claiming legitimate business expenses is perfectly legal, excessive or unusual deductions can raise red flags. This includes high deductions for travel, meals, entertainment, and home office expenses. To avoid suspicion, only claim necessary and ordinary deductions for your business, and always keep detailed records to substantiate your claims.

Large Cash Transactions

If your business handles a lot of cash, you may be more likely to be audited. The IRS requires companies to report cash transactions over $10,000. Failure to do so can trigger an audit. To stay compliant, report all large cash transactions and keep meticulous records.

Consistent Business Losses

If your business consistently reports losses, the IRS may question whether you're genuinely trying to make a profit. If not, your business could be classified as a hobby, and you could lose your business deductions. To avoid this, ensure your business activities are carried out businesslike with the intent to make a profit.

Late or Incomplete Filing

Filing your tax returns late or submitting incomplete or inaccurate forms can also trigger an audit. To avoid this, always file your tax returns on time and double-check your forms for accuracy before submitting them.

Good organization and timely filing are the primary ways to avoid an IRS audit. Keep accurate records of your income and expenses, file your tax returns on time, and report honestly. Consulting with our office is always a good idea if you need clarification.

If you need help with organization, responding to a notice, or any other aspect of your business's finances, don't hesitate to contact our office. Our experienced professionals are here to help you navigate the complexities of small business taxation and ensure your business stays on the right side of the IRS.