For most of us, getting audited by the IRS is akin to having a root canal. The difference is, a tax audit can end up being a lot more painful.
As a business owner, you need to be aware of the potential red flags that can trigger an audit and act on them before the IRS does. Here are three of the most common:
- Classifying employees as independent contractors. Independent contractors and employees are not the same, and it's important to understand the difference. In the eyes of the IRS, misclassification can be seen as an attempt to avoid payroll taxes, and noncompliance can bring penalties and back taxes.
- Home office deduction. This deduction is very specific, and not all home-based businesses will qualify. Likewise, if you run your business from a commercial location and claim the home office deduction, you might attract some attention from the IRS. Know how to determine if you are eligible to claim it and what specific expenses you can write off.
- Large sum miscellaneous deductions. If you claim a large number of itemized deductions relative to your income, the IRS will get suspicious. Likewise, if you bucket a lot of miscellaneous expenses, you may raise eyebrows. Be specific and label every deduction.
Keep Business, Personal Expenses Separate
The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle for personal use. Be diligent about keeping good records, and maintain separate personal and business bank and credit card accounts.