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No one wants to get audited by the IRS. It’s a long, drawn-out process that can be very expensive and damaging to your business.

First and foremost, let’s look at what an IRS audit is. The Internal Revenue Service (IRS) conducts audits of tax returns to ensure compliance with federal tax rules. The IRS takes this action when they feel that there is something amiss with the information submitted on an individual’s or business’ tax return.

What can trigger an IRS audit?

There are certain things the IRS looks for when conducting an audit. If you’re doing any of these things in your business, it may increase your chances of being audited. Here are some red flags to watch out for:

Not keeping good books and records

It may seem simple, but you would be amazed how many business owners make mistakes here, which results in a lot more stress and hassle than it needs to be. Keep accurate records of your income & expenses, as well as copies of all receipts for purchases made for your business (including mileage if applicable). Make sure these items are recorded consistently each month.

Claiming too many business expenses

Just because something is being spent on by your business does not mean that it can automatically be deducted from your taxes. To avoid this mistake, take time to learn what types of expenses the IRS considers to be deductible before filing any paperwork or paying any fees.

Making mistakes on tax returns

A tax return that contains mistakes will definitely trigger an audit. You must ensure you review your tax filings thoroughly before submitting them to the IRS; this includes making sure there are no arithmetical errors, and all required documentation is included. Any discrepancies in the information on a vendor’s W-Forms should also be reviewed carefully, as it may increase the chances of receiving an audit from the IRS.

Filing late or not filing at all

Regularly file your taxes on time and accurately. The most common mistake made by taxpayers is not filing their returns at all or submitting them late. Even if there is no balance due, you should make sure to send in your return before the deadline each year to avoid interest charges and other penalties as well. If you are worried about knowing which forms to fill out or getting them done on time, hiring a tax professional is always an option that can save you from making mistakes.

Failing to report all income on your tax return

If you happen to have multiple sources of income then this can be another trigger that flags the IRS’ radar and sends your tax return over for a closer look. As a business owner it is important to know how much money you are making simply because any time a discrepancy arises, it will be looked into further by the examiners.

Excessive Charitable Donations

Another popular audit trigger has to do with charitable donations as many business owners claim deductions from those types of contributions on their taxes every year. Before you claim those deductions as business expenses on your tax return, however, it is important to be aware of the narrow guidelines and rules that govern this type of deduction and how much evidence you need to back up those claims. If you happen to fall into any grey areas on your tax return at all then prepare yourself for a little extra attention from the IRS.

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Home Office Deductions

Finally we come to another popular audit trigger that has to do with home office deductions. Over the years the amount of people who take advantage of this deduction has increased significantly, which makes sense considering many businesses are conducted from an individual’s home these days (such as consulting).

Nevertheless, taking full advantage of this deduction requires meticulous record-keeping, filing of the correct forms, and knowing exactly what you are allowed to deduct from your taxes. If you make any major errors on this section of your return then you can expect some extra time spent going over it with a fine-tooth comb.

Multiple cash transactions

The IRS is especially interested in businesses that deal primarily in cash transactions. If your business receives cash payments on a regular basis, be sure to deposit them in your business bank account so there is a record of your earnings. Make sure you can provide a detailed explanation of all the income and expenses associated with it. Any cash payments over $10,000 must also be reported using IRS Form 8300.

Sole proprietorships reporting big losses year after year

While there is nothing wrong with having a sole proprietorship, it does come under increased scrutiny by the government for certain reasons: First off, sole proprietorships are easy to set up and run. This means they can be used by criminals as a front for illegal activities. Secondly, sole proprietorships often report large losses year after year which may signal tax evasion activity on behalf of their owners (IRS).

Well prepared is half done

Although some common factors tend to trigger an audit on your business’ tax return more often than not, there is no sure-fire way to level the playing field and escape one’s notice of the examiners of the nation. However, even if it never happens, being well-prepared for an audit will help reduce any anxiety or stress that may come along with it.

Keep detailed financial records

One of the most important things you can do is to document all your business transactions on time. In addition to receipts, it’s also a good idea to keep a record of all expenses and income related to your business along with any other financial documents that you have. If you have a lot of complicated accounting work to do, hiring a financial professional is always an option.

Keep additional copies of your tax returns

In the unfortunate event that you are audited by the IRS, it’s always wise to have additional copies of your business’ tax returns. This will help make the process go smoother and reduce any potential headaches that may come along with an audit.

Understand the tax regulations and laws

One of the easiest ways to avoid an audit is by understanding how you can legitimately reduce your business’ taxes. It’s also important for you to have a clear understanding of what expenses are claimed as deductions on your business tax return will help prevent an audit. Also, keeping up to date with any changes in tax regulations and laws will help you avoid getting into trouble with the IRS.

How to respond to an audit

If you are notified that your business is being audited by the IRS, it’s important to remember to stay calm and be professional. An audit may be requested by mail or in person at your business. You should never ignore a request for an audit because even if you are not guilty of anything.

There are a few things you can do to help make the process go as smoothly as possible:

Contact your tax preparer or accountant so you don’t have to worry about any legal trouble that might come up due to faulty information. They can help you determine whether or not there was some sort of mistake made on your tax documents and fix it before the process goes too far.

– Gather all your financial records related to the audit, including receipts and other documentation that support the information on your tax return.

– Be cooperative and honest with the IRS examiners. They are just doing their job and, by being cooperative, you can help make the process go a lot smoother.

– Don’t panic. An audit is not the end of the world and, chances are, everything will be resolved in a timely and efficient manner.

what if you are audited by the irs

By following these simple tips, you can help ensure that your business’ audit goes as smoothly as possible. And remember, being well-prepared is always half the battle.

How long does an IRS audit last?

That depends on the type of audit you are involved with – correspondence audits tend to be short and limited in scope; office audits can take longer particularly if the agent wants access to your business records which means that they have to spend time out of the office to examine them.

But in general, when someone is dealing with an audit, they are looking at an average of about 20 hours per week devoted solely to the matter – either preparing for it or trying to deal with its aftermath.

The IRS is very thorough in its auditing process and if they find something that doesn’t seem quite right then there will likely be an audit. It pays to know what red flags you should watch out for so that you can plan accordingly. Let us help with tax planning or other financial services like bookkeeping or payroll processing.
Want professional assistance? Reach out to our team today!

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