I am sure most of you have filed your return and are ready to deal with the next tax concern.  AM I GOING TO BE AUDITED?

Do you know that some industries are more likely to be audited than others?   According to a report published by Avalara and Peisner and Johnson last year, 60% of audits target only four industries.  Those industries are retail, food service, manufacturing, wholesale/distribution, and Construction.  If you fall into one of those categories or not, you should really be aware of the most common tax audit triggers.

NET LOSSES

Reporting net losses in more than two of five years, you can expect to be audited.  This is especially true of sole proprietors.  Be sure to have documentation and receipts to back up the claims and deductions made on your return.

BUSINESS VEHICLE EXPENSE

The IRS is looking at this deduction more than ever, especially if you claim the vehicle is used entirely (100%) for business.  Keep detailed records for every business trip.  Include the date, mileage, and purpose of each.  Do not include any business travel that occurs along your normal commuting route.

EXTENSION REQUESTS

Consistently filing late will increase the likelihood of being noticed by the IRS.  Once on their radar it is hard to avoid an audit.  Organized books will put you in a position to get started on your return early in the season.   If you don’t have the time or knowledge to get your books in shape consider hiring a bookkeeper short-term to get them ready for your accountant.

CASH TRANSACTIONS

Businesses that deal mostly in cash transactions can expect to be audited more than a non-cash business.  Large purchases paid in cash really raise a red flag.  Credit card fees have stabilized and equipment is often free so try looking into moving away from cash sales. If this is not possible, it is essential that you maintain impeccable records.

HIGH DEDUCTION TO INCOME RATIO

We like deductions because they reduce our tax liability.  Just be sure that you are only taking those you should.  Large deductions may trigger an audit if they are out of proportion with your income.  Sole proprietors and Single Member LLC’s must be particularly cognizant of this balance, because at certain income levels the IRS imposes a limit on deductions.

WHAT CAN YOU DO TO MINIMIZE THE LIKELIHOOD OF AN AUDIT?

These are just a few things that will put your tax return on the IRS radar.  The good news is when armed with the correct information you can proactively take steps to minimize your chances. of being audited.

First, I would suggest asking your accountant or tax preparer if they see any red flags.  Honestly the good ones will point them out before you ask. 

Second, if you don’t have the time or knowledge to get your books in shape consider hiring a bookkeeper to get them ready for your accountant.   Most bookkeepers offer this once a year service in addition to ongoing maintenance packages.

Check back next week to find out what to do if you do find yourself the target of an audit.