A small business in Austin, Texas, has to pay taxes, but as with any taxpayer, it doesn’t come without the risk of audits. The IRS conducts an audit when they suspect something fraudulent or incorrect on a tax return. There are certain red flags the IRS looks for before they decide to audit.
Claiming personal expenses as deductions
Some business expenses could include meals and travel, but a business owner who takes their family to a business meeting can’t deduct the cost of them. While the IRS allows some deductions for personal vehicle use related to work, claiming 100% business use for an only vehicle may raise a trigger.
However, a driver can commonly take a deduction on a separate business vehicle based on depreciation. The taxpayer needs to back these deductions with documents showing who they attended with, the reason for the meeting, and mileage logs with dates.
Too many independent contractors
If the number of independent contractors surpasses standard payroll employees, the IRS could get suspicious. Owners commonly hire contractors to save money on payroll taxes and social security taxes.
They also may be attempted to make cash-only payments and not report them or underreport them. This doesn’t mean they can’t hire independent contractors, but that the IRS establishes rules on who counts as an IC.
Math errors
The IRS may conduct audits because of simple math errors, such as writing or typing $3,000 instead of $5,000. Credit card companies now keep records of transactions and submit them to the IRS, so they know when a mistake occurs.
If the taxpayer makes a simple math error, the IRS corrects it and sends a notice of what they corrected. However, several errors in calculating credits could raise suspicion. Software may help eliminate math errors, but taxpayers should still double-check their return.
Tax audits are rare, but when they happen the taxpayer doesn’t have to deal with IRS tax law alone. The taxpayer needs a good defense to fight the audit.