The 9 Common Tax Audit Triggers – Part 2

5. Claiming Business Losses Every Year

Business losses are part of the small business world. The first few years are tough and sometimes you’ll go through a rough period after enjoying profitable years. However, if you are constantly claiming losses, year after year, you’ll be on the IRSs radar. They might assume you’re taking deductions you’re not entitled to or under-reporting your income.

6. Filing a Schedule C

Most small businesses report their income and expenses on a Schedule C. This form does increase your odds of being audited but don’t let the fear of an audit prevent you from filing this form. One way to avoid filing this form is to have your business setup as a corporation. This can have its own set of issues but you won’t need to file this form anymore.

7. Excessive Entertainment or Charitable Deductions

Some business owners feel entitled to deduct entertainment or deduction expenses and if they are legitimate and fall within the guidelines of the IRS than you should absolutely take those deductions. Taking your family out for dinner or donating to your local religious organization for a purchase of a piece of art is not an allowable deduction. If your tax return has higher than average entertainment or charitable deductions, this will set off an alarm with the IRS and a possible tax audit will follow. For this reason, if you are going to be taking large deductions of the kind listed in this section, make sure you have excellent records. To take the deduction for entertainment you must substantiate where it occurred, with whom, and for what purpose. Deductions of higher than $75 must be accompanied by a receipt.

8. Claiming Your Vehicle As 100 Percent Business Use

Most people get confused when it comes to properly deducting your auto expenses. Basically there are two ways to do it. The choice is based on which one gives you a higher deduction. You can use the IRS standard mileage deduction or the actual expense. You can’t deduct both of them. Finally, if you claim 100% deduction of your automobile or you’ll need to have all records on hand. This deduction is scrutinized quite a bit. When deducting for business use of a car, you’ll have to choose between the IRS standard mileage rate and actual expenses. Deducting both of these on your tax return will bring the IRS knocking. In addition, if you claim 100 percent business use on the depreciation form for your vehicle, you’ll need precise records that include mileage logs, dates, and the purpose of every trip.

9. Drastic fluctuations in income from year to year. 

This one is hard because plenty of small businesses have had an unusually good or bad year here and there. If you’re reported taxable income this year is dramatically higher or lower than in previous years it might send a red flag to the IRS. Fluctuations in income can signal that something went unreported in prior years. However, if you keep proper records and have a good bookkeeping system, you don’t have to worry. As long as you can substantiate your expenses and income, you can be ready even if the IRS does have to audit your books.

Have questions about your taxes? Contact us to discuss them. 

West MidlandsAccountants LTD, we are here to offer you support, help you save time, and ensure your records are up to date. Ultimately, we can help you save money. Contact us by phone at 01217 665 477 or email info@westmidlandaccountants.co.uk for more information