According to The Kiplinger Tax Letter, small businesses are on the radar of IRS auditors because many of them know from experience what may be excessive write-offs and income hidden or not reported by some business owners and self-employed individuals.
We’ll look at some of the more common audit triggers to be aware of so you can better prepare your business with proper record keeping in the event of a tax audit.
Above-average deductions: The IRS tends to look at disproportionally large deductions in the context of income reported and may flag you for audit if your write-offs are extraordinarily high.
Higher than average charitable deductions: IRS agents have been checking on various substantiation requirements such as filing Form 8283 for noncash donations over $500. Getting an appraisal for a large charitable gift raises IRS flags. Façade or conservation easement gifts are also interesting to IRS agents.
Self-employed and small business owners: Higher-income sole proprietorships, as well as smaller ones, get IRS scrutiny because auditors know from experience that some self-employed claim excessive write-offs and avoid reporting all their income. Proprietors who report over $100,000 of gross income on Schedule C, and small businesses collecting a lot of cash can also be scrutinized. Additional targets are those who claim 100% business use of a vehicle. For post-2017 returns, IRS auditors will likely try to make sure that businesses are no longer deducting entertainment expenses.
Reporting no adjusted gross income or loss: Taxpayers who show Schedule C losses and show wage and other income are juicy audit targets for IRS examiners. The Internal Revenue Service gets even more suspicious of those who attach a Schedule C to include losses from ventures that appear to be hobbies. Various real estate activities can also raise auditor antennae. Schedule E losses or reporting loss from asset dispositions are looked at closely as well.
Alimony: This is one of those areas involving the complexities of family relationships and can be subject to abuse. The IRS has experience with filers who claim this write-off and don’t meet the requirements. Alimony will be even more closely examined to see whether taxpayers are complying with recent changes in tax law. For example, alimony paid pursuant to post-2018 divorce or separation agreements is not deductible.
Of course, there are many other signs and clues that IRS agents look for when examining returns from individuals and businesses. For our small business owners, it’s crucial to dot your i’s and cross your t’s in your record keeping. Making sure you know what’s deductible and what isn’t will inform your accounting function and better prepare you at tax-filing time.
It’s really never too early or too late in the year to have a tax planning checkup. That’s why we’re here. If you have questions about tax planning for 2019, feel free to contact us online or call (603) 232-7436.