Are you a small business owner, worried you might be audit bait? The Internal Revenue Service (IRS) is in business to make as much money as it can, as efficiently as it can. Congress wants the IRS to increase revenue by looking for sure audit targets. Here are 5 common reasons you might get audited.
1. 1099 Document Matching
The IRS keeps track of 1099s issued in your ID number. If your business is reporting revenue on your business tax return that is less than the amount of 1099s attributable to your ID number, you will receive a letter notifying you of an IRS examination.
It’s a simple, automated check for the IRS. It’s an audit risk and potential nightmare for your business.
2. Employees Versus Subcontractors
If your business is reporting compensation for services mostly as subcontracting services versus employee wages, you are looking for trouble.
One of the top priorities in 2011 was for the IRS to look at how services by individuals were categorized. Small businesses pay less tax when they categorize services as coming from a subcontractor instead of an employee. In imbalance in subcontracting deductions versus W2 payroll deducations can get you flagged for an audit. Not issuing 1099s when you are reporting commissions or subcontracting services can also get you that audit letter.
3. Truck and Auto Expenses
The IRS looks at your deductions and if too much is taken for auto or truck expenses. This is especially the case for service-type businesses.
Small business owners can take auto expenses at the rate of 50 cents a mile (2010) and wrongly assume that no documentation (receipts) is required. That is not the case. The IRS is focusing on truck and auto expenses. If you try to claim too large a deduction using the Standard mileage method, you increase your chances of being flagged for audit.
4. Losses / Low Net Income
The IRS is wary of small business owners who show a small profit or loss for several years in a row. The IRS has your address and they know what it costs to live in your neighborhood. If you own a fairly nice home with a mortgage and your tax return has shown a net income of say 1 to 35 thousand dollars or a loss for several years, you will probably get noticed and possibly examined.
5. Earned Income Credit (EIC)
The IRS is on the prowl for business owners who report income at a level that will allow them to receive the earned income credit but not pay any tax.
At certain income levels (around $5,000 to $35,000), income from a business and certain other factors, such as dependent children under age 19 or full-time students under 24 years of age, can result in an earned income credit of $5,000 or more. The IRS is aware of this and they will audit you if they suspect you are manipulating your income to receive the EIC and a big refund.
Are You At Risk?
Running a small business is all about risk and hard work. The last thing you need is an audit. These are 5 of the most common reasons you might get audited. Do yourself a favor and make sure your not raising any red flags when you file your next tax return. Or call us. We can help.