3 Reasons The IRS Will Audit Your Small Business
Will the IRS audit your small business? I know it’s not a fun thing to think about, and I don’t want to put fear into your day. (As a small business owner, you’ve got enough going on!) But as an accountant who is looking out for you, I want to share the things you need to know. And one of those things is about the possibility of a tax audit.
Tax audits are a real part of owning a business. They can be even if you don’t, but the odds of getting audited seem to be higher if you do.
So how likely is it that the IRS will audit your small business? Let’s talk about that now.
First, let’s talk data. As of 2021, on average 4 in every 1,000 tax returns gets audited. But there was a lot craziness during COVID. We had SBA loans and PPP loans. We also had the ERC credit paired with the funding for the IRS to close the “tax gap.” So I suspect that the number of audits will increase for 2022 and beyond.
Now, here are the top 3 reasons the IRS audits:
Failing to report or unreported income. The IRS will match the data from what you report against what everyone else reports. This includes things like 1099s from merchants, customers, gambling, rent, W2 income, unemployment income, etc. If your numbers don’t match, don’t exist, or are under what has been reported, this is a red flag for the IRS. (This can also be attributed to a “whoops I put the number in wrong” if you are doing your own taxes.)
Earned Income Tax Credit (EITC). The IRS estimates that around 26% ERC claims are done in error. So if you claimed one, make sure you have all the proper documentation to prove how you got there.
Losses on a Schedule C (and Schedule C filers in general). Having losses too many years in a row is also a red flag, unless there’s some special case (like research and development phases). Most people who have a small business tend to take on their data entry themselves. This is a very dangerous game, even if you have hired a CPA to file your taxes. CPAs don’t normally verify all of your expenses, but they get in writing that you have verified it. So if you don’t have someone looking over your books (other than your CPA) you could be writing off things that you think are legitimate business expenses, but are not. This can trigger an audit.
As someone who looks at dozens of books and business tax returns every day (for 17 years now!), I can attest that most books are NOT done correctly. (Even the ones that hire CPAs to file their taxes.)
Compliance is KEY. After that, you can look into legal ways to lower your tax bill.
AND I have good news for you! I’ve opened up a few spots on my calendar for business owners like you. So you want a second opinion on your books, book a call with me today.
Looking forward to helping ease your mind going into this upcoming tax season!
Until Next Time,
Love, Light, & MONEY, Honey…
Kaylee