The IRS uses a computer program called the Discriminant Function System (DIF). The system analyzes returns and flags them for outside statistical norms. When a tax return receives a high DIF score, an IRS agent reviews the file to determine if it should undergo an audit. While you should always file your business taxes accordingly if you receive a request for a small business audit, it could be due to one of the following reasons:
Claiming Losses Year After Year
Every business goes through ups-and-downs but if you file losses on your annual taxes year after year, it may create suspicion. If you show losses three out of five years, you will more than likely attract the attention of the IRS. For one, you should not be filing hobby expenses as business losses. Moreover, any deductions that cannot be validated as legitimate business losses should remain off your taxes. You must be able to justify how they directly affected your business.
Excessive Deductions
In addition to claiming consecutive losses, if you begin to file excessive deductions, you may face an audit. For instance, taking a family vacation and writing it off as a business expense can have major consequences. Higher than average expenses require justification. Receipts from airlines, meals, transportation, should be directly related to your business. Any traveling expense greater than $75 should be kept for documentation. As a small business owner, you could have valid reasons for traveling, which is why it’s crucial that you keep records of write-off expenses.
Numbers Are Rounded Up
When it comes to rounding up or averaging numbers, it is never acceptable to do this in your tax return. Rounding up numbers implies that the numbers are not accurate. If you made $59,989.47 last year, do not report your income as $60,000. Doing so will trigger an IRS to review your taxes as it reveals inaccuracy. The IRS tends to believe that if you’re sloppy in this one area alone, the rest of your return may not be entirely accurate.
Don’t Face an IRS Audit Alone
If you’re facing an audit, contact Clifford, Ross, Raudenbush and Cooper, LLC, for the legal assistance you need to deal with IRS. Even if you’ve done your part to avoid an audit, there’s a chance that you can be selected at random. When that does happen, you need an experienced team to guide you in the right direction. Your small business will be in good hands when you come to us.