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Red Flags That Can Trigger an IRS Audit

According to the Minnesota Society of CPA’s, there are several red flags that could trigger an IRS audit – especially for LLC or corporate business owners. Of course you always want to make sure that the income you report matches all W-2 and Form 1099 income that will be reported by others to the IRS. Those making spousal support or “alimony” payments must ensure that the amount paid matches the amount listed by the corresponding former spouse. Perhaps the most commonly known and discussed audit trigger is unusually high charitable contributions that exceed the IRS’ average for your income range.

Business owners must be cautious about the percentage of home mortgage and expenses that are allocated for a home office, and you should document these calculations for the IRS. Those with an S Corporation should make sure that the owner’s salary is not conspicuously low. Taking a low salary and then distributing profits that result in a high income (six figures) may be a huge audit flag to the IRS. Large amounts for meals and entertainment expenses for any type of business are often cited as audit targets.

While today’s IRS is definitely leaner due to severe budget cuts, don’t let the sensational headlines announcing a forecast for the “lowest number of IRS audits in years” lower your standards. The IRS has advanced its systems, and the ability to cross reference not only information between individual returns but corporate data and information provided by financial institutions here in the US and around the globe. The IRS has more incentive than ever to increase the amount of revenue generated by audits, and US taxpayers, especially business owners must be prudent.

If you are concerned about business tax returns, or have been contacted by the IRS for an audit we invite you to contact us for a free consultation at 866-631-3470. Learn how to protect yourself and the value of the attorney-client privilege.