Almost every owner of a small business will try to avoid an IRS tax audit. Despite the fact that the chance to undergo this audit is quite low, it’s much better to be prepared because whether the IRS will start the procedure, you will not be able to change the situation. In addition, there are misunderstandings about how much to pay, which tax forms to use, whether you should pay extra tax or receive a tax refund. All this can be disappointing.
The IRS Audit Committee uses a computer program called the Discriminant Functional System which analyzes the results and marks them in the auditor’s report if they don’t meet statistical standards. When the return receives a high DIF score, the agent analyzes it to determine if the audit is needed. Here is the list of five IRS audit triggers you’d better avoid.
1. Round numbers
Th stay on the safe side, it is better not to use neat round numbers like $200 on your 1040 form and supporting documents. When performing your calculations, be accurate and avoid too noticeable rounding. You should round to the nearest dollar but not to a hundred. If you bought something for $293.42 and claim the purchase as a business expense, round the amount to $293, not to $300 because the IRS may ask for evidence.
2. Math errors
If the IRS starts auditing you, there is no reason to cry in order to stop it when you realize that there are some mistakes. The only thing you can do is to avoid them in advance. Simply don’t write wrong numbers and be quite attentive to notice the final zero or that you wrote 3 instead of 9. Of course, we are just humans and mistakes can happen. But you need to check your numbers several times. IRS will hit you with fines despite the fact your mistakes were only intentional. If you are not very keen on math, you can use good tax preparation software or a tax preparer in order to avoid mistakes.
3. Constant business losses every year
The IRS may start an audit if you report losses from the business for several years in a row. Some people find spending on hobbies unprofitable which is illegal under the tax code. The IRS may think that you are making deductions for which you are not allowed to avoid paying taxes if you have a legitimate business that constantly claims a loss. But there are some cases when business owners are really going through several bad years and can clarify the situation by proving that their business is legal and using their notes to explain the deductions they made.
4. Big charitable donations
In case you actually made a notable contribution to charity, you are entitled to some deductions. But reporting false donations wouldn’t lead to a good result. If you are not able to show the necessary documents confirming the validity of your contribution, don’t report it. Claiming $20,000 in charitable contributions with your $50,000 salary may call a surprise.
5. Home office deduction
Home office deductions are lull of fraud. It may be attractive to give yourself false deductions for expenses. The IRS strictly defines the deduction in the home office only for people who use part of their house exclusively for business. It means that if you use the part of space in your home only for work, in this case, it can be called a home office.