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

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The 9 Common Tax Audit Triggers – Part 1

1. According to statistics, just 0.9 percent of people who make under $200,000 were audited last year, compared to 10.9 percent of those who made over $1 million. If your schedule C shows more than $1 million in sales, the odds of being audited increase substantially. With such increased odds of being audited, you must keep meticulous financial reports.



2. Large deductions that look out of proportion to your sales or income. Deductions that reduce your taxable income substantially are a red flag if they seem too high when compared to your income. The IRS uses tables to decide if your deductions are too high for your income bracket. But don’t go searching for these tables because they aren’t made public. We know that at times, those out-of-proportion deductions are legitimate. For instance when you’re just started your business or during times of slow growth. For this reason, you must keep track of all your deductions and have detailed records if you ever need to substantiate them.                                               

3. Reporting rounded number show likely is it that your investment returns were exactly $1500, or that your mortgage interest deduction was $12,000? Reporting too many round numbers are deemed fishy by the IRS and can trigger an audit. If you made $72,532.65 don’t report $72,500. This kind of reporting is deemed inaccurate and sloppy and if you are found to be inappropriately rounding in one area the IRS will assume you’ve done that in another area of the return. They’ll deem the entire return questionable.


4. Home Office Deductions

Because home office deductions can be so easily abused, last year, the IRS simplified how small business owners can calculate the deduction. But to take this deduction you’ll need to satisfy numerous criteria. This deduction is a big red flag so make sure you’re satisfying every requirement, one such that the home office area be used exclusively for your business.


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

Read More