Many business owners do not even consider the possibility of being audited. You should always prepare for this to happen. There are some red flags that could trigger an audit. If you are aware of these and can avoid them, you could also deter an audit.
Why am I audited by the IRS?: 8 Invitations to an IRS Audit
Due to the current federal deficit, there is a $300 billion gap between the amount that we pay in taxes and the amount the IRS believes we should have paid. To close this gap, the IRS is conducting more audits, trying to find that extra tax money and mistakes that you may have made when filing.The IRS has posted a job that is titled Internal Revenue Agent (Abusive Transactions Group) The job description for this position states, “Agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.”
You may make the mistake of believing you will not be targeted for an audit because you are not wealthy, do not have an accountant filing your forms or do not operate a cash business. Even though you engage in none of these, you are still a target. In fact, tax return audits doubled from 2000 to 2009. During the same time period, enforcement earnings increased by 50 percent.
Unfortunately, not every taxpayer is treated impartially with regards to the potentiality of an audit. Of businesses that have less than $10 million in assets, one in every hundred or 1% will be audited by the IRS. For those with $10-$50 million in assets, that number jumps to ten out of every hundred businesses or 10% that are audited. When the business has more than $250 million in assets, they have a 1 in 4 chance or 25% of being audited.
There are certain industries that will be targeted more than others. Cash businesses are always on the top of the list. You may be surprised at the target groups of the IRS. There are auditor guidebooks for many industries, including veterinarians, Laundromats, car dealers, ministers and many more. There are specific auditing strategies for the IRS in the Retailer Guide which are aimed at e-commerce businesses, direct sellers, pizza shops, mobile food vendors and gas stations.
It is important for you to be aware of the red flags that could lead to an IRS audit.
1. Math Errors or Calculation Errors Submitted to the IRS
Always double check your numbers. Math errors are the leading cause of IRS audits.
2. Unusually High Itemized Deductions
The IRS can easily determine what your deductions should be. If your itemized deductions are not in line with your income, you will be a target for an audit.
3. Self-Employed / Schedule C Taxpayers
Most small businesses are suspected changing their expenses. Take caution when taking a home office deduction, have shown a loss for several years in a row and prepare your own taxes.
4. Submitting many 1099s to the IRS
The IRS began a three-year initiative in 2010 to crack down on the misclassification of contractors. In hopes of adding money to the depleted Treasury coffers, many businesses are targets for an audit. Never misclassify an employee as a contractor. If you are not certain seek a CPA’s advice for assistance. You will never be sorry you did.
5. Unreported Income to IRS
Always report your earned income. The IRS will know if you are not including income and you have received a 1099. Other sources of income must also be reported, such as alimony.
6. Previously Audited by the IRS
If you owed fines and taxes and have been audited in the past, you are still a target. Most people believe they will not get audited twice, but this is far from the truth.
7. Shareholder of a Company
If you invest in a partnership or a corporation that is being investigated by the IRS, they could come after you personally as well.
8. Disgruntled Former Employees
Former unhappy employees are the biggest informants. Many people will report another to the IRS for payback. However, the IRS is also allowed to pay informants a reward for reporting someone. The informant can actually receive as much as 30% of what the IRS collects from the audit.
Helpful resources: For added perspective, readers often compare QPRT Trust Guide, BDIT Trust Guide, and official IRS estate and gift tax guidance before making final trust-planning decisions.
Questions that usually come up next
People exploring Why am I Audited by the IRS often move next to the practical questions: when to act, what to fund, and how much control can stay with the original owner.
Details that often change the outcome
- Timing matters because tax planning usually works best before a crisis or audit pressure appears.
- Control matters because retained powers can change how the IRS views a trust or transfer.
- Funding matters because moving the right asset, in the right way, often matters more than the label on the document.
What usually helps after the main answer
Many readers narrow the decision by comparing Irrevocable Trust, Asset Protection Trust, and What Is a Grantor. When government rules shape the decision, many readers also review official IRS estate and gift tax guidance.
