5 Audit Risk Factors: Is Your Small Business At Risk?

Getting a letter in the mail from the IRS indicating that you are going to be audited is one of the scariest things that can happen, whether you’re a small business owner or not. However, did you know that there are certain things on your tax return that can increase your risk of an audit? Some of these things may not be avoidable, but if they apply to you, you need to ensure your returns are done as accurately as possible.

Here are 5 tax audit risk factors that you need to be aware of

1. Type of Entity – The legal structure of your business will determine many things, one of them being how and what you file when it comes to your tax returns. If you are running your business as a Sole proprietorship, or a single member LLC, you run a higher audit risk than if you were an S or C-Corp.
2. Deductions – Another factor that can make your tax return a high audit risk is the type and amount of deductions you are claiming on your tax return compared to the industry that you are in. For example, if you own a laundromat but spend a lot on travel, you will likely to be audited, however, if you run a travel agency that may not be the case.
3. Income Amount – Your business profits is also going to be a big indicator. One of the most common reasons why businesses are flagged for audits is if they have been operating at a loss for four consecutive years. Not only would that pop up as a flag for the IRS to audit you, but they could also declare your business as a hobby and disallow future losses.
4. Large Donations – If you are claiming that you have donated large items (such as cars, houses, etc.) then make sure you keep all the paperwork to prove it. Likewise, if you are donating a large amount of cash as well, make sure that you are keeping your donation receipts.
5. Filing on Paper – While most people think that filing on paper makes your return less likely to be audited, that is not the case. Tax returns filed on paper can prove to be a higher audit risk for a couple of different reasons. First, filing on paper leaves more room for a mistake to be made, whereas electronically there is less manual input that is needed. Second, an IRS agent will have to physically go over your return, meaning they may spend a little more time scrutinizing it.

So those are some of the ways that your tax return can become a higher audit risk. While some of these things can be mitigated, others are unavoidable and just require more time and attention. If you happen to get audited head over here to our other post about surviving an audit without receipts. Also, especially if your tax return is considered high risk, sign up for a free trial of neat software so you can start getting yourself prepared today!