5 Reasons Your Small Business May Be Audited by the IRS

Being audited by the IRS is something that gives every business owner nightmares.

As a small business owner, the thought of getting audited by the IRS is probably enough to make your blood run cold. However, your chances of getting audited are actually quite slim. In fiscal year 2019, an IRS report showed that only 0.45% of Americans were audited for their income tax returns.

While this seems like good news, the decrease is actually more driven by budget cuts in the IRS rather than trust in taxpayers. Even with the small chance of being audited, you're never completely immune. The chance is always there — especially with companies that raise red flags.

1. Unreasonably High or Low Salaries for Shareholders Who Are Employees in S-Corporations

If you're providing unreasonably high salaries for any shareholders who are also your employees, you're treading on thin ice. "Unreasonably low" salaries for S-Corp owners are also a big red flag. Any amounts paid to a shareholder employee must be considered "reasonable compensation."

To keep this from happening, be careful when issuing salaries to shareholder employees. Make sure salaries are reasonable based on the skill level of the employee, your geographic location and the industry your business is in.

2. Claiming Too Much Business Use of a Vehicle

When you have a vehicle that is not designated for business use, never claim 100% business use of the vehicle on your taxes. If you do, you're raising a red flag to the IRS. If the vehicle is clearly used for both personal and business use, always be honest in its usage. Additionally, you should maintain detailed calendar entries and mileage logs for all business uses of the vehicle.

3. Reporting Too Many Net Losses Too Frequently

If you report too many net losses too frequently, you add to the reasons your small business may be audited. In general, it's best to report net losses no more than two times every five years.

To keep yourself in the clear, follow the business expenses guide found in IRS publication 535.

4. Excessive Deductions for Entertainment, Business Meals and Travel

Some people take a lot of liberties when claiming business expenses on their tax filings. If the IRS notices an unusual amount of deductions for business-related travel, meals, and entertainment, you may be selected for an audit.

You should also make sure you are honest and never claim something is a business expense if it was clearly not done for business reasons. If you really do have a lot of valid deductions, make sure you hang onto all your receipts and keep detailed records.

5. Consistently Filing Tax Returns Late

The IRS notices when you file your tax returns late. If you're trying to stay under the radar, filing late is not the way to do it. You'll also draw negative attention to your business if you consistently pay any owed taxes late.

To get on the IRS's good side and minimize your risk of being audited, always file and pay your taxes on time (or early!). It's wise to put money aside throughout the year to put toward any owed taxes.

Avoid an Audit: Schedule Small Business Tax Preparation Services

Filing your own taxes can be stressful. It also puts you at a higher risk of making mistakes and unintentionally raising those dangerous red flags. Consider hiring professional small business tax preparation services to avoid gaining unwanted attention.