Like most governmental agencies the IRS is looking for money and it appears that the amount of audits will be up again this year.
As you can imagine the service uses computer algorithms to search returns for items that may be out of the ordinary.
In this post we will examine some of the most common red flags that can cause a business owner to be picked for an audit.
1. Not Reporting Income: This is obvious, but needs to be addressed. At times business owners forget the IRS receives copies of all 1099s and W-2s you receive. So, not only do you want to report all income earned, make sure to correct any incorrect 1099’s that you may receive.
2. A Large Change in Income: The service keeps records of all of your previous tax data. This means a red flag will occur when there’s a big change from the previous year. This is usually a problem when a business has shown a large loss when in previous years it had large profits.
3. Higher Than Average Deductions: The algorithms compare your returns against other tax payers in your area and the type of business. It does look for large meal and entertainment deductions that are out of the ordinary. Make sure that you can back up your deductions with good documentation such as: the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting.
4. Home Office Deductions: The deduction is legitimate as long as you follow the rules closely. When done correctly you are able to deduct a percentage of your rent/mortgage, property taxes, utilities, phone bills, insurance, and others. You can find information on how to properly take this deduction by going to http://www.irs.gov/newsroom/article/0,,id=163079,00.html
5. Large Charitable Contributions: This is one area where having receipts or letters from the charitable organization can save you a lot of pain. Make sure to file form 8283 for donations over $500.00
These are just some of the red flags to keep an eye out. Of course, you should always consult with a tax professional about these items and any other tax related information as your circumstance may be different.
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