Audit. A word that no business owner wants to hear. According to a 2016 MarketWatch report, small C corporation businesses with revenues less than 10 million dollars had an audit rate of about 1%. Midsize business with revenues between 10 and 50 million dollars saw approximately 6.2% of returns audited. So, although the actual chance of an audit is rather small, there are still steps that can be taken to ensure that your company returns don’t come under scrutiny.
Payroll Errors: If you’ve forgotten to include the required IRS information regarding the payroll deductions for Federal tax, FICA, Social Security and Medicare, this could trigger an audit. Also, if you’ve neglected to pay these employee deductions on a quarterly bases, this is also a red flag. The IRS also looks at any abnormal activity in payroll, such as excessive loans to company officers.
Excessive Deductions: There are many deductions you can take as a business owner. However, if the deductions are unreasonable or appear suspicious, the IRS will take a closer look. In particular any deductions made for fringe benefits, entertainment expenses, and travel all must be in-line with the revenue generated by the company
Suspected Personal Expenses: This is where things can get tricky for those who are self-employed and/or working out of their home. Some examples of deductions that might get closer scrutiny are cell phone bills, meals, and vehicle lease or loan payments.
Mathematical Errors: Accuracy is important. Your return should be checked for any errors. Avoid rounding up figures and use the actual numbers. If you round up one year and not the next or there are substantial errors that make one year’s return markedly different from another year, the IRS is going to take a look.
Missing or Late Forms: There are many deadlines to meet and forms to file when you’re running a business. Taxes must be paid quarterly, and there are various forms that need to be submitted at different times of the year like Form 941 that should be filed quarterly. Miss these deadlines or fail to submit them and you’re inviting a closer look at your returns.
Repeated Losses: Businesses are meant to make a profit. This isn’t to say that a business can’t have a bad year. However, if your business is showing year after year of losses, the IRS is going to wonder why you are still in business.
Cash Transactions: Any cash transaction over $10,000 needs to be reported by banks and merchants. If you’ve received a cash payment of $10,000 or more from a client or customer for one transaction OR two or more related transactions, this must be reported to the IRS with Form 8300. Dealing in a lot of cash payments can raise red flags.
These are just a few of the things that might have the IRS taking a closer look at your returns. But, remember, there is no need to fear the audit. Keeping accurate records, saving the proper receipts, and being accurate and on-time with your filing will keep you on the right side of the IRS.