As you may know, President Joe Biden is asking for $80 billion to help the IRS increase enforcement staffing, technology and additional bank reporting.
This is expected to generate an estimated $700 billion in tax revenue over the next decade.
But what does it really mean for small businesses?
Many believe it will ensure higher oversight and greater risk of audit for all businesses, and not just those earning over 400K.
But fear not. If you’re documenting everything properly and legally accounting for all your earnings, you have nothing to worry about.
But it’s good to know that there are known red flags that can increase your chances of being audited.
So if you want to avoid the headache and panic that can sometimes accompany an audit, here are 5 IRS red flags to avoid doing in your business:
IRS Red Flag #1: Rounded Whole Numbers
We get it. Working with non-whole numbers can be tedious. But don’t be tempted to round to make things more convenient at the time. Even if you’re rounding up.
It’s a big red flag if the IRS sees that a business isn’t using exact numbers to denote earnings and expenses for tax purposes.
Use accurate numbers. If the actual numbers end up being whole, great. But if they end up being decimals, use them as they are in their accurate form, unless otherwise specified in your tax filings.
IRS Red Flag #2: Taking Too Many Deductions
Every business has valid business deductions. And as long as they are considered ordinary and necessary for your business, by all means take them.
However it is important to be careful when you choose your deductions as a small business owner. This is especially true for sole proprietors, as they are at a greater risk of being audited than other business classifications.
So if you think that a travel expense, purchase, meal, or gas fill up is pushing the boundaries or ordinary and necessary (or actually business related), it’s best not to claim it as a deduction.
Lastly, if you haven’t experienced significant growth or changes in your business, but suddenly claim more deductions than you had in previous years, it could be another potential IRS red flag. There are situations where this occurs and is legitimate though, so be sure to keep great records (and those receipts)!
IRS Red Flag #3: Consistently Filing Payroll Taxes Late
Filing your payroll taxes late on a consistent basis can lead to more than just penalties. It’s the fastest way to get your small business on the IRS’ radar. Be sure you’re filing your taxes in a timely manner, even if that means hiring this portion out of your business to ensure it is done accurately and in accordance with the legal schedule.
IRS Red Flag #4: Failure to Report Taxable Income
Filing your taxes late is one thing. Not filing them at all is another. Failure to report any taxes, including payroll taxes, is the biggest red flat of all for the IRS.
Not reporting your own personal income is also another warning sign. The IRS wants to ensure that you aren’t withholding income in your calculations. If you fail to report payroll taxes or personal income, you should expect to hear from the agency at some point.
IRS Red Flag #5: Cash Transactions
This one is a no-brainer. Your small business is more prone to IRS audits if you regularly process cash transactions.
The reason for this is because it’s more difficult to verify cash income. So when it comes to deductions – especially larger ones like company vehicles, equipment and other investments, try to pay for these using credit or debit cards to avoid additional IRS scrutiny.
While we’ve been conditioned to not use credit cards, so many business cards offer cash back options, so if you make a large purchase, then pay it off before interest accrues, you end up reaping the benefits of cash back incentives.
However, if you do prefer cash and can’t bring yourself to use cards, make sure to maintain detailed records of cash transactions to help in the case of an audit. You can also complete IRS Form 8300 for any receipts exceeding $10,000 within the U.S.
So there you have it. While we can’t avoid the additional oversight that is coming, we can take steps to ensure we aren’t unintentionally shining a beacon on ourselves by taking note of the red flags above.
This article is for informational purposes only and not intended to be legal or official tax advice. We always recommend discussing with your attorney or tax professional to determine how this information affects your specific situation.
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