Am I In Danger Of An IRS Audit?
When your small business receives an IRS Audit notice, it can come as a complete surprise. Tax audits often seem random and unfair. For the IRS, data analysis often makes auditing an unavoidable, systematic process.
Like most massive organizations, the IRS relies on technology to guide their auditing efforts. Taxpayer data analysis generates IRS audit candidates based on Random Selection, Computer Screening, and Related examinations.
Random Selection and Computer Screening
IRS random selection isn’t all that random. The IRS National Research Program compiles, compares, and analyzes taxpayer and Census Bureau data. The results provide a tax gap estimate that identifies how much money the IRS should receive versus what taxpayers actually pay. The IRS fills the tax gap by auditing taxpayers based on data-verified reporting, filing, and payment non-compliance.
The data also identifies taxpayers who don’t comply with data-generated “norms”. If the IRS identifies your business return as atypical or potentially non-compliant, the system may select you for an IRS audit.
Can You Avoid Random Selection and Screening?
The IRS theorizes that there’s a “gray line” between intentional and unintentional mistakes. Data can flag your return as non-compliant. It can’t determine whether your non-compliance is due to cheating, evasion, confusion, or simple carelessness. Because it could go either way, the IRS may choose to audit your business.
You can minimize your IRS audit potential by eliminating mistakes that label you as a non-compliant taxpayer.
- Calculation Errors: Even if everything else on your tax return is fine, mathematical errors give IRS examiners a valid reason to take a closer look at your return.
- Unreported Income: IRS data tracks business income independently reported by other sources on a form 1099. If you fail to report the income, IRS technology easily matches the 1099 tax ID or social security number to you.
- Continuous Business Losses: If you consistently show business losses year after year, the IRS takes notice. They may decide that your business is an elaborate tax avoidance scheme instead of a for-profit enterprise.
- Unreasonable Deductions: The IRS captures data on every type of business and every type of expense. They track the average expenses all types of businesses incur. If you deduct expenses that far exceed these norms, you risk an IRS audit.
- Home Office Deductions: If you operate your business out of your home, you can only deduct costs for space, equipment, or supplies you use exclusively and regularly for your business. Most employees who work at home for another company cannot legitimately deduct at-home office expenses.
Audits Based on Related Examinations
Even if your business tax return complies 100% with taxpayer norms, you may still be in danger of an IRS audit. This is likely if the IRS is already auditing your business partners, investors, or others involved in your transactions or operations. While you might be able to avoid a relationship-based IRS audit, you should be aware of the possibility.
Our Bookkeepers Can Help
Our professional bookkeepers track your daily cash flow and sync your financial records. We accurately document your sales, expenses, wages, and other tax-deductible costs. We organize and document your financial data, so you don’t include data mistakes on your tax return.
Goode Bookkeeping and Consulting can’t promise that you will avoid an IRS audit. If the IRS audits you, organized, accurate financial data can contribute to a better outcome.
Contact Goode Bookkeeping and Consulting
Contact us to find out more about our bookkeeping services. Reach out to us at 860-659-6543 to arrange your free appointment or complete our consultation form.