You’ve just spent weeks tracking down receipts, combing through spreadsheets, triple-checking your math, and sending everything in to the Internal Revenue Service. At last, you’re finally done with last year’s taxes… right? Not quite. The stress and uncertainty of tax season doesn’t end when you file your return. There’s always a chance you could be one of the unlucky people who gets audited by the IRS.
Throughout the year here at inDinero—but especially around April, May, and June—we hear similar questions about audits from business owners like yourself. As tax and accounting pros, we have answers, but those answers aren’t exactly reassuring.
“Who does the IRS audit?” Anybody.
“When does the IRS audit?” Any time in the next three years, or possibly after that.
“How far back can IRS audit a business?” Up to six years.
“Why does the IRS audit?” Usually because there’s something questionable about your return—but now and then, for apparently no good reason.
To be clear, it’s unlikely your company will get audited. That doesn’t mean you shouldn’t be prepared. While your overall chances are slim—fewer than 1% of taxpayers get audited by the IRS every year—audits do happen, and some people are more at risk than others. On top of that, the IRS reserves the right to examine your returns up to six years after they’re filed (and in some cases, even longer).
Which audit triggers should you be looking for?
Don’t let an audit disrupt or halt your business. Stay ahead of the IRS by familiarizing yourself with the most common red flags federal tax examiners look for. Here are a few signs an audit might be around the corner, along with audit checklists for your business:
1. Your numbers don’t add up.
Simple filing errors typically don’t trigger audits, but multiple mistakes and miscalculations could draw the attention and scrutiny of a federal tax examiner.
Ask yourself the following questions—for every “no” answer, your chances of getting audited increase:
- Did you use accounting or tax preparation software to calculate your taxes?
- Did you keep your personal and business expenses separate?
- Can all of your business expenses be considered ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your trade or business)?
- Are you confident your return matches up with other income information statements, such as W-2 and 1099 forms?
- If you file quarterly, do those records reconcile with your annual return?
- Was your return reviewed by an accountant?
2. You claimed to be making or losing a lot of money.
Money talks. One of the most significant risk factors for an audit is your deduction-to-income ratio. The IRS is also on the lookout for filers who a) generate high incomes and b) underreport their incomes, or claim too many deductions or credits.
Consider the following:
- Did you report all your income?
- Is your adjusted gross income (AGI) lower than $200,000?
- Did you claim only the deductions for which you’re eligible?
- Do you have documentation to back up your deductions?
- Did you claim only the exemptions that apply to you?
- Did you claim only the credits that apply to your business?
- If you claimed any credits, did you follow the proper recordkeeping procedures?
- Did you report all your charitable contributions (including the value of donated property) accurately?
- If you reported multiple years of losses, do you have the records to prove those losses?
3. Your return seems highly complex or incomplete.
Taxes are complicated. However, some returns are too complex even for the IRS’s automated systems, in which case an examiner will get involved. On the other hand, overly simplistic returns look suspicious as well.
Consider the following:
- Did you fill out your forms and report everything completely?
- Do your numbers look like accurate numbers, rather than round estimates?
- If you itemized your expenses, do you have documentation that substantiates those expenses?
- Did you follow the filing requirements for every state in which you do business?
- If you have foreign activities or shareholders, did you file all required forms (forms 5471 or 5472)?
- If you have a foreign bank account, did you report it?
Keep in mind that these are just a sample of the many questions and considerations for business owners looking to avoid an audit. This is truly one area where it pays to be paranoid.
Nonetheless, there’s nothing you can do to eliminate the possibility of an IRS audit. Instead of obsessively going over your return, focus on what you can do now to prepare for an audit. After all, thousands of businesses survive them every year. Check out inDinero’s quick guide to audits, which explores the different kinds of audits and how to successfully work with an IRS agent.
How can you decrease your risk of getting audited?
Want to lower the odds even further? Here are a few general steps you can take to protect yourself and your business:
1. Keep everything well-documented and organized.
Don’t wait until you get audited to get your books in order. Thorough and rigorous financial recordkeeping won’t only make filing your taxes quicker and easier, but will also reduce your chances of making the kind of mistake or omission that triggers an audit. If you do get audited, documentation is the key to getting through the process in one piece.
2. File on time, every time.
The IRS takes deadlines seriously, and so should you. Beyond facing penalties, late filers also increase the likelihood that they’ll be audited. This is particularly true for a taxpayer with a high income or a history of filing late.
3. Work with a tax and accounting expert.
When in doubt, you can count on the tax and accounting pros at inDinero. In addition to minimizing the chances of an audit in the first place, we’re here to help if and when that dreaded letter arrives in the mail. We act on your behalf when a tax notice or audit pops up, serving as liaison to the IRS and state tax authorities, and providing you with regular updates and action plans.
Don’t waste another second fixating on your taxes—schedule time with our experts today to get the audit reassurance you need to focus on more important things, like growing your business.