Ways to Decrease Audit Risk

4 RED FLAGS THAT COULD GET YOUR COMPANY AUDITED

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Most businesses receive a significant amount of mail each week. While checks are probably the most pleasant to receive, the award for most unpleasant goes to correspondence from the IRS.

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No business wants to receive a notice that it is being audited.

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Though most audits are resolved within a year, that is a lot of added stress on your team and a major distraction from your company’s goals.

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Fortunately, there are ways you can decrease your company’s risk of being audited. If you can avoid these four things that the IRS considers major red flags, your likelihood of an audit significantly decreases.

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Your company does not make quarterly estimated tax payments.

Per IRS guidelines, sole proprietors, partners, and S corporation shareholders should make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations should make estimated tax payments if they expect to owe tax of $500 or more when the return is filed.

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Sole proprietors, partners, and S corporation shareholders use Form 1040-ES to calculate their estimated tax. Corporations use Form 1120-W.

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Your company’s deductions are disproportionately high compared to its income.

Companies and individuals alike try to think of every possible deduction to reduce their taxable income. However, if a company’s deductions are not reasonably proportionate to what is normal for its income level, it may catch the attention of the IRS.

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Sometimes this scenario is completely legitimate, such as when a business is first starting or has a rough year. If you have the documentation to back up your deductions, don’t hesitate to claim them.

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Your company has a large amount of entertainment deductions.

These deductions include travel, meals, and customer or client entertainment expenses. Historically, this category has been one of the more abused deductions, and therefore, it is thoroughly examined by the IRS. If the amount of the deductions seems high for the size of your business, the IRS will start digging. Make sure that every expenditure has a clear business purpose and that you have supporting records for each.

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Your company reports drastic changes in income or deductions.

It is reasonable after a year of massive business growth to have deductions that are thousands more than what was reported on the previous year’s return. But that difference is a red flag for the IRS, so decrease the likelihood of an audit by providing documentation of the business growth and necessary expenses with your return.

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The same is true if your return shows a massive change in profit. If you anticipate your company may be flagged for an audit, be prepared by gathering your documentation in advance during the process of filing the return.

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If your business is chosen for an audit, don’t be alarmed. The IRS has a resource page to help answer your questions about the audit process.

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If one of our clients is audited, we help by providing any records or documentation needed as part of the audit process. If you want to be certain that you will be prepared in case of an audit, we’d be happy to schedule a consultation to talk about your business needs.