Top 5 Audit Red Flags

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Do you ever hear stories about business that do not get audited but maybe should? OR businesses that do everything they can yet still get audited?
In all honesty, the IRS is understaffed and underfunded. They have to choose very carefully who to audit, which is why some get chosen and others do not.

Here are five of the most common factors that can trigger an IRS audit.

1. Co-mingling Funds

Especially with small businesses, maybe a one-man-band. It may get difficult to decipher what money you spent for personal things or your business if you do not have separate accounts. Having separate funds for your business is crucial for the finical success of your business. If you are not keeping business and personal separate it is nearly impossible to have a clear image of where your business stands financially.

2. Large Misc. Itemized Deductions

Large miscellaneous itemized deductions on Schedule A of your tax return is also a major audit red flag. The IRS has very accurate data on the average size and amount of various deductions thanks to the 300 million tax returns they receive every year. Using this data, the IRS can quickly tell if your deductions are too large for your income bracket. If so, that might be enough to trigger an audit of your return.

3. Filing Late Tax Returns

Extending and hitting the extension due date is not an issue. However, not filing an extension or missing the extension deadline can cause issues. Especially if it is a repeated behavior. Not being on top of your returns may trigger an IRS audit. More time pushing back your return causes they to think some unnecessary and illegal activity may be happening.

4. Unreported Income

The IRS receives a W-2 for every wage earner in the United States, as well as various 1099s for other types of income. This makes it very easy for IRS computers to check to make sure the majority of taxpayers of accurately reporting their income. Missing a W-2 or 1099 on your tax return is an easy red flag and audit trigger. The IRS sees that as you trying to show you do not make as much as you do to hopefully in the end pay less taxes. It may not always be a malicious act, it may be by accident. Either you moved and it was lost in translation or just misplaced entirely. However, that is why it is so important to keep track of all the money coming in and how it got there and how it needs to be documented.

5. Inadequate Books and Records

Even though this is number five on the list it is the most important. Mainly because all other red flags tie into not having adequate books and records. Annual book clean up gets very messy quickly. It will take up a lot of time and energy to have to comb through 12 months of bank statements to try and piece together financial statements. That is why keeping track monthly is so important. It allows you to see the financial picture of your business more clearly. Not keeping the correct records makes things even more complicated if the IRS does come knocking and asks for things you cannot provide. Inadequate records will make the financial picture of your business that is presented to the IRS unclear, which is what will raise a flag on their end and potentially call for an audit.

All in all the most important step you can take to prevent an IRS audit is to have monthly financials, this allows you to keep track month to month to make sure you provide the most accurate representation of your business.