The IRS may audit only 1 percent of all tax returns annually, but if you’re one of the unlucky few, you may be wondering “Why me?” Since the agency doesn’t have enough personnel to closely review each and every tax return they receive, they rely very heavily on their computer systems flag items of “interest”.. Here are six of most common “red flags” that may impact a business owner filing a personal return.
Failing to report all taxable income
Mismatches between the 1099s and W-2s you’ve received and what you report on your tax return are easily caught by the IRS computers. Be sure to quickly correct with the issuer any 1099 that is not yours or lists income incorrectly.
Cash-intensive Ohio businesses
If you operate a taxi, car wash, bar, hair salon, restaurant or other business that is cash-intensive, the IRS will be watching your tax return closely. Historically, cash-intensive businesses have been less accurate in reporting all of their taxable income, and the agency has trained agents in new techniques to interview business owners and audit for unreported income.
Large charitable deductions
Because of past abuse of this deduction, the IRS closely monitors charitable deduction, especially if the deduction is disproportionately large compared to your income. Donations of property of more than $500 must also obtain an appraisal, and the risk of an audit increases if you fail to get the appraisal and file the accompanying Form 8283. Documentation, including receipts for cash and contributions throughout the year, are crucial. Contributions of cars, boats and planes continue to draw special attention.
Home office deductions
Because historically taxpayers often don’t meet the requirements for taking this deduction and may overstate the deduction, the IRS continues to take a close look at home office deductions. The space must be used exclusively and on a regular basis as your principal place of business in order to claim a percentage of rent, real estate taxes, utilities, phone bills, insurance or other costs.
Business meals, travel and entertainment deductions
This is another area where taxpayers have made excessive claims, the IRS looks closely at meal, travel and entertainment deductions for self-employed taxpayers. When the deduction appears too large for the business, agents look for detailed documentation including the amount, place, persons attending, business purpose and nature of the discussion or meeting.
Claiming 100 Percent Business Use of a Vehicle
It’s very rare that a taxpayer actually uses a vehicle 100 percent of the time for business, especially if no other vehicle is available for personal use – so this deduction is considered “red meat” for IRS agents. To face IRS scrutiny, keep detailed mileage logs and precise calendar entries for the purpose of every road trip. You can also not claim expenses for out-of-pocket expenses such as maintenance or insurance if you use the standard mileage deduction.
Obviously, properly filing your tax return and providing the necessary documentation will greatly lessen your chances of an IRS audit.
Contact our Ohio Tax Audit specialists
Do you have mismatches between your 1099s and W2s? Worried that your tax return might raise some red flags at the IRS and lead to a troublesome audit? Contact Rea & Associates for assistance in sorting out your documentation and properly filing your tax return. Our Ohio tax specialists will review documents and prepare a correct return.