There is a certain sinking feeling a person undoubtedly gets when they receive a letter from the IRS in general, but an audit notice can really put a damper on the day. The process of having the IRS audit your business can be extremely stressful. Mistakes do happen. Underpaying on taxes can lead to a huge penalty in combination with the total still owed in taxes. Under reporting income can lead to penalties that are dependent upon what percentage of personal income that you didn’t report or pay taxes on. A Denver tax advisor or tax attorney in your area can help you make sense of the notice you have received. Below we will cover the five red flags that can lead to the nightmare that is an audit by the IRS. Keep in mind, the IRS can audit your business for any number of reasons. Consult with your tax advisor if you think you’ve made a mistake on your taxes before you file.
Mistakes When Filing Taxes
It’s bound to happen at one point or another. After all, we’re all human. Mistakes can and most likely will happen when filing taxes for your business, especially if you’re brave enough to take on this challenging and stressful task by yourself. Your business will probably have dozens of tax forms and records to fill out and organize. While errors on taxes are going to be accidental in nature, the IRS will still want the money owed to them. Delaying your payment will not make the problem go away. It could actually make things worse because the tax debt will build interest, and interest will add up to the tune of around 5% until the debt is paid off in full.
Finding a mistake can be remedied by keeping excellent records, receipts, and hiring a tax advisor to look at your taxes before the IRS gets a hold of them.
Home Office or Business Run from Home
If you run your business from home, or simply keep an office there, you can apply for tax breaks for the amount of the home that is used for the business. You’ll need to be honest about the amount of space used though. Have a dedicated room; the spare bedroom, guest room or den might make for a great at-home office. Those that say that they use their entire home to work are sure to be contacted by the IRS, even if it’s true. Claiming you are using the whole house as a workspace won’t satisfy an auditor. The IRS will come to your home to measure your workspace to see if you were being truthful.
The same goes for your car. If your personal vehicle doubles as your company vehicle, you may be able to claim part of your car payment, insurance, fuel, and mileage on your taxes. But it’s important to be honest about this as well. Refrain from claiming your personal car is used for 100% business, unless it actually is used completely for business. Regardless if it’s your personal vehicle or truely a company car, keep great records and receipts for anything related to it business-wise.
A Large Number of Expensed Items or Services
The unfortunate truth is that many people try to take advantage of expensing personal items and services on their business accounts. Listing these as true business expenses is an easy way to get the attention of the IRS, as this practice is rampant. It’s best to always keep your personal and business taxes separate.
Keeping receipts and good records are a must for a tax audit. Luckily, there are several apps available that make record keeping as easy as taking a picture and storing it on the cloud, if that’s best for you and your company. Lost receipts and misplaced records could add up and potentially cost you more money in the long run.
Excessive Number of Online Payments
Keep in mind that online payment platforms are scrutinized by the IRS since many people who use these won’t report their income to the government. The fact is that there are so many popular payment platforms such as PayPal or Venmo that it makes it tough to remember every single one that is used. Accepting payments in cryptocurrency like Bitcoins then cashing them in for the cold, hard cash can create other tax problems as well.
On the flip side, when used correctly, online payment platforms can be a great way to provide proof of taxes paid and manage income. Utilizing freelancers can be a huge advantage for a company but this can turn into a nightmare if the person refuses to fill out tax forms. Online payment platforms can also make taxes a bit easier since it’s all online or stored in a cloud. This way records aren’t easily lost or misplaced.
Deductions for Food, Travel and Entertainment
While you can take deductions for such things as food, travel, and entertainment, the IRS is famous for jumping on write-offs. If you’re planning on taking these deductions as business expenses, be sure you can answer and have accurate records for the expense amount, location, date and time, people attending, business purpose, and the reason for the meeting. If you get audited, the IRS will want as much information as possible. If you can’t provide all of the details accurately and correctly, you take the risk of your claim being denied.
It’s important to avoid the red flags mentioned above as the IRS is one part of the government that you don’t want paying attention to your business, regardless of how successful you are or aren’t. Finding a tax professional or tax advisor can reduce or eliminate the chances of an IRS audit or reexamination of the taxes of your business.
