10 Reasons Why Businesses Get Audited And How To Avoid Them

Do you think multinational corporations are more vulnerable to audits? Though it makes sense to inspect the financial aspects of well-established companies, the reality is different. American small businesses observed a 41% rise in audits between 2005 and 2007. Corporations worth more than $10 million got inspected 29% less often than privately-owned businesses.

Flourishing entrepreneurs must worry about what triggers the Internal Revenue Service to examine their fiscal records. If you know what interests the IRS, you might avoid an audit since it’s a stressful, time-consuming, and monetarily dangerous experience. So, here are some significant reasons why companies get audited in 2021:

Red Flags That May Get Your Company Audited

Late filings:

The IRS disapproves of businesses underestimating their deadlines. Late filings don’t just result in heavy penalties but may also put you up on the government’s radar. On the other hand, filing your taxes on time seems agreeable to the IRS and doesn’t provoke any scrutiny.

Solution: Don’t wait until the last minute when it comes to filing your taxes.

Filing an amended return:

According to the IRS, amended returns go through a screening process. They may get audited since it shows the IRS that you aren’t sure about what’s happening at your company. Sometimes, the errors in your original tax return get ignored then its amended successor raises some eyebrows.

Solution: Don’t make mistakes in the original return in the first place and make it error-free. Hire a professional who has pursued BS accounting online or campus-based from a reputable institute. This accountant may file the original return on your behalf to avoid any mistakes, confusion, or other red flags.

Cash transactions:

It’s complex to verify revenue received in hard cash. So, large cash transactions alert the authorities, and you may find yourself audited by the IRS. So, be careful when buying a company car or purchasing a piece of business equipment via cash.

Solution: Always leave behind a proper money trail or prefer using a debit/credit card.

Using digital currency:

The world has become bewitched with the wonders of Bitcoin and Dogecoin. But this trend is fresh, and the IRS will be inclined to inspect your financial transactions if your business deals in the digital currency. So, please wait until we learn how this trend will influence our national economy.

Solution: Don’t center your organization around cryptocurrency.

Mixing business with pleasure:

Are you taking a client out to a ball game? Make sure that you buy the tickets with your money. Do you wish to vacation in the Bahamas? Fine! But don’t write it off as business expenditure. Keep your personal and business lives separate. You can’t spend the company’s money on your pleasures.

Solution: Don’t combine personal expenditures with business ones.

Errors and mistakes:

Errors can draw attention to your business and compel you to explain them in front of the IRS. The bigger the error, the easier it’s to get detected – may it be intentional or accidental. It caused by untrained employees and overlooked mistakes such as typos or unchecked spelling/grammar.

Solution: Use accounting software that minimizes these errors with digital automation.

Too many round numbers:

Don’t rely too much on round numbers or make it a habit to use round numbers. Unless you get instructed to round them off, the numbers shouldn’t be changed lest they seem modified. So, many businesses find themselves audited by the IRS for taking liberties with their calculations.

Solution: Always work in decimal points and don’t even use averages while filing your taxes.

Excessive charitable donations:

It’s soothing to see businesses being charitable but giving too much appears suspicious while dealing with the IRS. They get alerted when someone suddenly starts to donate large sums of money. Since organizations may give money to charity to avoid taxes.

Solution: Make YOY (year-over-year) donations and always donate to nonprofits.

Claiming rental losses:

The IRS defines the renting of a proper as a passive activity. Since you merely possess an asset. Even if it doesn’t generate income, you can’t claim losses for this non-service. So, claiming rental losses will arouse someone’s suspicions at the IRS, and your business may get audited by their agents.

Solution: If your gross income doesn’t exceed $150,000, you can claim less than $25,000 in losses. But if you make around $100,000, it’s possible to claim a total of $25,000! Though you spend 50% of your time working in the real estate industry, there’s no limit to rental losses you may claim.

Hidden income:

In the end, the biggest reason why the IRS targets a business is when they believe the owner hasn’t reported all of his/her taxable income. Hiding some portion/s of your income is a big “no-no” when we talk about the IRS. If you’re withholding income, it may lead to an audit.

Solution: Don’t hide your income and report anything you’ve stored in an offshore bank account.

Conclusion

Nobody wants to be audited by the IRS! As the story goes, even Joker is afraid of getting caught by them for financial misdeeds. But how likely are you to go through an inspection by the IRS? Well, it isn’t much likely since the IRS audited just over 700,000 tax returns in 2019. Should you be afraid of the IRS?

If you haven’t misrepresented yourself, an audit by the IRS won’t be anything more than a nuisance. Business owners should worry about the IRS only if your business makes over $1 million every year. Moreover, the failure to report all of your income or claiming disproportionate business deductions also makes you susceptible to strict financial scrutiny.

Related Posts