That Could Get Your Small Business Audited

There’s no surefire way to avoid a tax probe, but according to Itwaru, small businesses can cut the chances of being audited by avoiding the following red flags.

1. Reporting a net loss in more than two out of five years. “If the business cannot satisfy three years of profits in a five-year period, you are likely to get audited, so it’s advisable to follow the IRS publication 535 guide for business expenses,” Itwaru says.
2. Consistent late filing of tax returns and payment of taxes. Failing to follow filing requirements and meet deadlines triggers penalties, interest and unwanted attention. Always ask for an extension if you won’t be able to meet a deadline.
3. Unreasonably high salaries paid to shareholders who are also employees. Determine reasonable salaries for your type of business based on industry, skill level and geographic location.
4. Excessive deductions for business meals, travel and entertainment. Maintain receipts for all expenses, along with detailed records, and don’t overstate these expenses.
5. Shifting income to tax-exempt organizations such as charities to avoid paying taxes. This is considered tax abuse.
6. Claiming 100 percent business use of a vehicle. “If the vehicle is not designated for business use and there is not another vehicle available for personal use, the business owner should maintain detailed mileage logs and calendar entries for the purposes of each trip,” Itwaru says.
7. Cash businesses beware. Cash-intensive businesses, such as beauty salons, restaurants and car washes, will always be under closer IRS scrutiny, as they are more likely to under-report taxable income.

Source: americanexpress

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