As a business owner, you want to avoid unnecessary attention from the Internal Revenue Service (IRS). However, sometimes even the most honest taxpayers may trigger an audit due to certain red flags on their tax returns. This article will discuss the five most common triggers of an IRS audit for businesses and where to find tax accounting firms.
1. Unreported Income
One of the most common reasons for an IRS audit is unreported income. This can happen in several ways, such as failing to report your business income, not reporting cash payments, or not reporting income earned from a side gig. The IRS has various tools and methods to identify unreported income, including matching your income to third-party records, such as 1099 forms and bank statements.
To avoid an audit due to unreported income, keep accurate records of all your income sources, report all cash transactions, and ensure you receive and report all necessary tax forms.
2. Abnormally High Deductions
Another red flag that may trigger an IRS audit is abnormally high deductions. Suppose your business expenses are significantly higher than similar businesses in your industry. In that case, the IRS may examine your tax return to ensure the deductions are legitimate.
Keep detailed records of all your business expenses, including receipts and invoices, to avoid an audit due to abnormally high deductions. Additionally, ensure all your deductions are legitimate and necessary for your business.
3. Home Office Deductions
If you are a small business owner who works from home, you may be eligible for a home office deduction. However, claiming this deduction can also trigger an IRS audit, as it is often abused by taxpayers who do not qualify for it.
To qualify for a home office deduction, you must use a specific area of your home exclusively and regularly for business purposes. Additionally, the space must be your principal place of business, or you must use it to meet with clients or customers.
To avoid an audit due to a home office deduction, ensure that you qualify for the deduction and keep accurate records of your home office expenses.
4. Large Charitable Donations
Charitable donations are a great way to reduce tax liability while supporting a cause you believe in. However, large charitable donations can also trigger an IRS audit, especially if they are significantly higher than your income.
To avoid an audit due to large charitable donations, ensure your donations are legitimate and have documentation to support them. Additionally, ensure that your donations align with your income and are not significantly higher than similar taxpayers in your income bracket.
5. International Transactions
If your business engages in international transactions, such as importing or exporting goods, you may be at a higher risk of an IRS audit. The IRS recently increased its focus on international transactions and has various tools to identify potential tax evasion and fraud.
To avoid an audit due to international transactions, make sure that you report all international income, such as foreign bank accounts and investments. Additionally, ensure you comply with all international tax laws and regulations, such as the Foreign Account Tax Compliance Act (FATCA).
Why Do You Need Tax Bookkeeping Services to Avoid IRS Audits
An IRS audit is a frightening prospect for anyone, and it can lead to costly penalties and other negative consequences. So, how can a tax bookkeeping service help you avoid an audit? Here are a few ways.
Accurate Record Keeping: A tax bookkeeping service can help you keep accurate records of all your income and expenses. This includes ensuring that you report all your income and deductible expenses, so there are no discrepancies that may trigger an audit.
Tax Planning: A tax bookkeeping service can help you plan for your taxes, so you don't owe more than you can afford. This includes planning for deductible expenses, taking advantage of tax credits, and estimating tax liability. With accurate planning, you can avoid costly mistakes that could lead to an audit.
Professional Advice: Tax bookkeeping services can provide professional advice and guidance on the best way to file your taxes and maximize your deductions. This can help you avoid making mistakes that could lead to an audit.
Using a tax bookkeeping service is brilliant for anyone looking to avoid an IRS audit. You can increase your chances of avoiding an audit with accurate record keeping, tax planning, professional advice, tax preparation, and representation. So, don't wait—get the help you need to protect yourself from an audit today.
While the above red flags may increase your chances of an IRS audit, it is essential to remember that not all audits result from wrongdoing. Sometimes, audits are simply a routine check to ensure taxpayers comply with tax laws and regulations.
To minimize your chances of an IRS audit, make sure that you keep accurate records, report all income and deductions, and comply with all tax laws and regulations. Additionally, consider working with a tax professional who can help you navigate the complex tax system and ensure your tax returns are accurate and complete.
Yasso Bookkeeping Solutions is one of the leading tax accounting firms that provides bookkeeping and accounting tax services specifically tailored to the needs of small businesses and nonprofits. We have a team of experienced professionals who are knowledgeable and experienced in working with small businesses and nonprofits. Contact us so we can discuss what we can do for you!