The #1 Way to Avoid an Audit

Someone asked me, “LuSundra, what is the number one tip you would give to help a business owner avoid an audit?”
My answer: Don’t invite one.

The IRS decides to audit.

The decision to audit lies strictly with the IRS. There really is nothing you can do to avoid an audit. No tax professional can ever tell you that you will or won’t get audited. We don’t make that decision. 

Are there red flags that may trigger an audit? Yes! 

However, you can also file a perfect tax return and still get audited. That’s just the nature of filing taxes. That’s why I always recommend preparing your return as if you knew that the IRS was going to show up tomorrow. Tomorrow may come one day. 

Red flags that can trigger an audit

There are some things that can trigger an audit. The sad thing is that these audit triggers are common knowledge, yet people seem to keep doing them and expect to NOT get audited. Talk about the definition of insanity! Anywho, here are a few audit triggers that send an engraved invitation to the IRS to audit you. 

Excessive business losses:

The most publicized fraudulent activity is with Schedule C business losses. If you have losses 3 out of 5 years, you might get audited. (In my best ‘You might be a redneck’ voice). 

Does having business losses automatically mean you will get audited? No. 

However, if you have years of business losses, and those losses consistently produce a large refund, that’s going to make the IRS pause and dig a little deeper. How can one stay in business if you’re consistently losing large amounts of money. 

All round numbers:

As tax professionals, we see it all the time. If all your income and expenses are even rounded numbers, you might get audited!

Income - $25,000

Utilities - $1,000

Advertising - $5,000

Commissions and fees - $7,000

Really?? All your income and expenses were these nice round numbers? No change? Have you ever seen a utility bill that was rounded to the nearest $10? 

All those round numbers tell the IRS that you are making up the numbers versus providing actual expenses. 

Cash Heavy Businesses: 

Businesses like barber shops, hair salons, car washes, vending machines, etc. are cash heavy businesses. Cash, for the most part, isn’t traceable, which tempts people to under-report their income. It also leads to the round figure reporting, discussed in the previous paragraph. Listen, don’t let the smooth taste fool you. The IRS has a Criminal Investigative division. Your audit may start out as the IRS requesting receipts or invoices to prove the information on your tax return. If you can’t provide what they ask for, the auditor will make an adjustment on your return. Make no mistake, a ‘simple’ audit can turn into a criminal investigation. 

Excessive Itemized Deductions:

The Tax Cuts and Jobs Act of 2017 removed the majority of itemized deductions and limited others. There are very few people who itemize their deductions these days. When taxpayers have excessive tax deductions, that may cause the IRS to pause and take a look. For example, if a taxpayer takes an excessive amount of mortgage interest deduction or has a disproportionately high amount of charitable deductions, an audit will be invited, because the numbers don’t make sense.

If you received an audit notice, reach out to us! We're here to help!