The words “tax audit” strike fear into the hearts of many people. No one likes to think that an audit may be coming, and while only a small portion of the population ever gets audited, it’s a concern for most taxpayers.
The reality is that the IRS only flags about 1-2 percent of the returns they receive for further audit, with half of these being taxpayers who make over $1 million a year. Of course, most of us fall well below this amount, but some situations might still trigger an audit, especially for small businesses. Let’s take a look at some of these common situations.
1. Making a Lot of Money
As we mentioned earlier, making a lot of money might draw the attention of the IRS. With that said, if you’re concerned about how much you make and whether it’s grounds for an audit by the government, contact a tax agent for guidance. This is especially recommended if you own a small business, as an accountant can offer advice and direction on a host of financial topics.
2. Doing a Lot of Cash Business
You may be more likely to be audited if you run a business that deals in cash transactions. This is because the IRS has found that such businesses sometimes “forget” to report income that should be recorded. Cash-heavy companies that may catch the eye of the IRS include hair salons, convenience stores, car washes, laundromats, and restaurants, to name a few.
3. Making Math Errors on Your Return
If you manually complete your tax return, be sure to check it over before sending it in. Errors in addition or subtraction will result in a flag of your return – even if the error is in the IRS’s favor. To avoid human error on your return, commit to using one of the many online tax preparation platforms available.
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4. Filing a Schedule C
As a small business owner, you’ve likely filed a Schedule C, especially if you file as an individual. This form allows you to claim your business income. Unfortunately, it also puts you in the group of returns more likely to be audited. There isn’t much you can do about this except to make sure you have all the documentation to back up your claims should you get audited.
5. Taking the Home Office Deduction
If you work from home regularly and do so in a dedicated part of your home, you might be able to take the home office deduction. This deduction allows you to deduct some of the cost of said dedicated space. Unfortunately, claiming this deduction might trigger an audit, but depending on how much the deduction saves you, it might be worth the risk.
6. Claiming a Loss Year After Year
The IRS doesn’t like to see that you’ve repeatedly lost money. If your tax return shows that your business has operated at a loss year after year, they may challenge whether you’re running a legitimate business. Some people like to write off expenses related to their hobbies as though they are part of running a business, which is illegal, and this is the type of thing the IRS is trying to catch.
Every taxpayer worries that the IRS will choose them for an audit. While audits only happen to about 1-2 percent of the population, they can happen to anyone. So, comply with the relevant tax laws, and keep the above-mentioned situations in mind. If you’re still concerned, consider working with a reputable tax professional to avoid being audited this coming tax season.