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Business Owners, Be IRS Audit Savvy this Tax Season

February 1, 2014

With tax season here, you might be wondering just how likely you are to hear from the IRS after you file by means of an audit notice. While the chances you will be audited are relatively low if you file a straightforward personal tax return, the more complex your tax situation becomes (reporting business income or graduating to a high-income tax bracket, for example), the more likely it is that you will be audited.

As you look to file your taxes this year, it pays to be aware of some red flags that can draw extra IRS attention including the following:

  • Claiming 100% business use of a vehicle. From the IRS’ perspective, it is rare for an individual to use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.
  • Deducting business meals, travel, and entertainment on Schedule C. Writing-off big dollar amounts for business expenses that could also be personal entertainment, especially if the amount seems too high for the type of business that is claiming them.
  • Hobby loss write-offs. If you have wage income and file a Schedule C with large losses, you become much more interesting to the IRS, especially if the business activity sounds like it could also be a hobby such as dog breeding or furniture refinishing.
  • Claiming rental loss deductions. Real estate losses on rental properties is another area of interest for the IRS, especially those written off by taxpayers who claim to be real estate professionals. If you have a W-2 or other non-real-estate businesses that show high income this can also be a red flag for auditing.
  • Operating a small business. Owners of cash-intensive small firms such as taxi companies, hair salons, pet groomers, etc. can often be the target of an audit, so be prepared to substantiate all of your income.
  • Owning a foreign bank account. The IRS has been able to obtain the ownership information for offshore bank accounts, especially those in tax havens, and is committed to ensuring that income stored in these accounts is reported by U.S. citizens. Failure to report these accounts can lead to harsh fines.
  • Taking higher-than-average deductions. The IRS may pull a return for review if the deductions shown are disproportionately large compared with reported income. But folks who have proper documentation shouldn’t be afraid to claim the write-offs.

While you should definitely take advantage of every tax deduction you are legally entitled to, sometimes it can be difficult to ascertain which deductions are applicable to your specific situation—that’s where our office can help you. Now is the time to contact us to have your return professionally prepared to reduce your chances of being audited for the red flags noted above. But, if you do receive an audit notice, don’t worry, our tax experts can also help you prepare an appropriate response.

   

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