Tax problems are one of the most common challenges entrepreneurs face, yet should easily be avoidable. Most red flags that trigger an IRS audit are calculated risks businesses run, but others are simply a product of ignorance. Intentional or not, tax collectors are sure to make violators pay.
Of course, it’s in your best interests to not mess with the agency in any way. This is why it’s worth your while to know the typical reasons behind an audit. Only by not making these mistakes you can keep your company from becoming a giant red dot on the IRS’s radar:
Having Numbers That Don’t Match
Not surprisingly, the disparities in the figures you write on the forms scream for the agency’s attention. This should go without saying, but you must ensure all of the numbers you submit to the IRS must be 100% accurate. If there’s any inaccuracy, you should be able to explain why and provide the right documents to support your reasoning.
Writing Off Unreasonable Expenses
You have every right to claim business-related deductions, but each one must make sense. If the IRS deems that the expenses you wrote are unnecessary and tied more to your personal needs than to your business’s, then don’t expect the agency to honor them.
An expensive dinner from a fancy restaurant or a corporate trip in Florida, for example, don’t always sound legitimate businesses expenses.
Deducting Home Office Expenses Incorrectly
If you’re self-employed or working at home a few times a week on a regular basis, you’re allowed to write off home office deductions. However, you must be clear what to claim and what not to.
Most experienced startup coaches and business development consultants would tell you that expenses are classified into prorated and dedicated. The former refers to the costs that apply to your overall home where only a portion is claimed (such as the Internet, electricity, and rent), while the latter refers to specific purchases made exclusively for your home office (like computer or furniture).
While some experts don’t buy the rumor that wrong home office deduction would automatically merit an audit, you should nevertheless know what you can claim to pay less taxes.
Defrauding the IRS is the fire you don’t want to play with. Getting away once doesn’t guarantee you’re out of the woods. You may pay a costly price for any blatant tax return anomaly.