The word “audit” strikes fear in the hearts of many business owners, but in reality, an audit is simply a review of your financial records. Still, the process can be time-consuming and costly if you’re not prepared. Knowing what the IRS looks for can help you reduce your audit risk and maintain peace of mind.
Common Audit Triggers:
- High Deductions Relative to Income
Claiming unusually high deductions, especially in relation to your income, can raise red flags. - Cash-Based Businesses
Industries like real estate, construction, salons, and restaurants tend to be scrutinized more due to the use of cash, which is harder to track. - Home Office Deduction Abuse
Improperly claiming home office expenses or failing to meet exclusive use requirements is a common issue. - Misreporting Income
Failing to report all income (especially 1099s) is a surefire way to attract IRS attention. - Round Numbers
Too many rounded numbers can suggest estimates rather than actual bookkeeping.
How to Avoid an Audit:
- Keep Accurate, Detailed Records
Maintain receipts, mileage logs, financial statements, and digital backups. - Use a Professional Tax Preparer
An experienced tax advisor can help ensure your return is filed accurately and optimized without raising red flags. - Be Consistent
Report income and expenses consistently year over year unless you have valid changes in business activity. - Avoid Aggressive Tax Positions
Taking deductions or credits that are on the edge of legality can prompt further investigation.
If You Are Audited:
- Respond promptly to IRS requests.
- Provide only the documentation requested.
- Consult your tax professional before replying.
Final Thoughts:
An audit doesn’t have to be a nightmare. With good documentation, ethical tax practices, and the right guidance, most audits are straightforward. Prevention is the best cure.