There will be IRS audit triggers that you need to be aware of. We will be focusing on self-employed people, sole proprietorships, single-member LLC, and some business owners that have a small workforce too.
Some of the small details here may look familiar and obvious but we still see it in our practice. Plus, most of the time being audited by the Treasury Department is mainly asking for clarification and proof.
Main reasons for audit triggers:
- Not using clean figures.
- Expense list is too much.
- Not reporting all income.
- Claiming 100% of the car is used for business.
Not Using clean figures
This will pertain to your expenses and qualify it as a deduction.
Doubtful
Cell phone- $150
Travel- $3,000
Food- $300
Profit Breakdowns
Also, Profit breakdowns ends with 0. If your profits- deductions exactly equates to zero, that could be a red flag. This is an audit risk.
Expense list is too much
Meals are typically inflated and the Treasury Department is familiar with it. The main reason is meal deductions needs to be relevant to the size and service of your company.
Mileage is another attention grabber with the IRS scanners. On the business activity code on Schedule C, you will be filing out the category of business that you have. If you’re going to claim 20,000 miles and you are a plumber, a contractor, or a pest control business, logging-in that mileage is reasonable.
But if you’re a website developer, bookkeeper or writer, having that same amount of mileage will trigger red flags.
Your deductions should make sense so it does not raise any attention. Be specific with the activities that your field entails, this will save you the worry and headaches when the IRS asks for justification.
Home office deductions are also a hot topic for the IRS. Same as mileage, it should be proportional and relative to the needs of your business.
Declaring 20% or more of your home as a place of business might increase the scrutiny of the IRS. But if you really use the twenty or more percent of your home for business, measure the specific rooms that you use. Plus take pictures of the rooms that you use to store your inventory, photo rooms if you’re an online seller, or where you keep your office, printers, office supplies, etc.
Report all income you receive
From 1099-G, 1099-int, stocks, investment incomes, W2-G and even low gambling winnings. If you receive these tax forms from an institution, the IRS also has a copy of that form.
Failing to report this income will trigger the attention of the IRS. If you get an IRS form always report it even if the value is not that significant.
Claiming 100% of the car is used for business.
The Treasury Department is aware that it’s impossible to use your car all the time for business. One important signal for them is that you don’t have another car that you use for personal use.
If you are using your car majority of the time for business, create detailed records of your trips. Use an app to save you time and money to monitor the use of your vehicle meticulously.
Consistency is the key
If you use a significant part of your home for your business don’t hesitate to claim it as a deduction. Same if you drive significantly and accumulate quite a number mileage. You need to be detailed and meticulous to justify these inquiries from the IRS.
Use apps and bookkeeping software that can help you tract and document these activities on your business and release yourself of worry when you receive a letter from the IRS.
If you have any questions, comments or you need help with your growing business, let us know. We’ll be happy to help you.
