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Stories of Internal Revenue Service (IRS) agents breaking down doors to confiscate small business property make the evening news. IRS agents clad in black suits wearing sunglasses seize what they can to make up for the sheltering of income that never sees the light of an income statement day. However, most small businesses under IRS scrutiny have no idea the tax collection agency is performing the much dreaded audit.
An IRS tax audit can turn your thriving business into an enterprise on the brink of a bankruptcy filing. Let’s review some of the red flags the IRS considers legal justification for exploring your business books more in depth.
You Run a Grocery Store, yet You Drive a Porsche
The first red flag the IRS typically notices is a disparity between a small business owner’s lifestyle and the income that matches the size of the business. After all, you can’t expect the IRS to turn its investigative head when you live like Bill Gates, but operate a corner delicatessen. If your tax return reports numerous deductions and little, if any income, you have just raised the first red flag for an IRS business tax audit.
Cash is Not King
Cash driven businesses often land on the IRS audit list for one simple reason: skimming. Small businesses that generate a healthy cash flow come under IRS scrutiny for hiding revenue. IRS agents receive training that includes assuming cash driven small businesses divert revenue into owner pockets. The best way to thwart an IRS audit for cash driven businesses is to keep meticulous records of all cash sales and expenditures.
Claiming Entertainment Expenses as Business Expenses
Far too many small business owners operate on the principle of “Let’s claim this personal expense as a business expense.” The IRS knows when small business owners claim meal, vacation, and other entertainment expenses in the accounts payable section of the business balance sheet. The IRS can legally demand that you present documentation that proves the business expenses claimed were actually expenses made to run your business.
The Old Automobile Expense Trick
Many small business operators use the same car for both personal and business purposes. If you claim personal automobile expenses on your small business balance sheet, you can expect a certified letter from the IRS demanding that you prove the personal car expenses were for business purposes.
Miscellaneous Means Cheating
Experienced business law attorneys discourage clients from claiming miscellaneous business expenses. An amount of miscellaneous expenses reported that exceeds the IRS threshold creates a powerful red flag that the IRS uses to justify an audit of your business. Miscellaneous expenses demonstrate shoddy record keeping, as well as intent to evade taxes by claiming bogus business expense deductions.
Inaccurate Payroll Tax Filings
The IRS notices discrepancies between what you file for payroll taxes and the income your employees receive. You have to ensure the payroll taxes you file match the payroll taxes deducted from the income of each employee.
Business bookkeeping errors cause several issues for small business owners, with the IRS knocking on your door representing the worst case scenario. Hiring a licensed business law attorney that has established a record of dealing with IRS audits helps you fight bogus tax fraud charges. Business law attorneys that specialize in tax-related issues also prevent you from making errors that lead to a devastating IRS audit.
Consult with a licensed business law attorney today to prevent the IRS from disrupting your small business.