Seattle Tax Law Blog

Worried about getting audited? Most people -- and especially business owners -- worry at least a little bit when tax season rolls around. Even if you feel like you did everything correctly, you're concerned that you may have overlooked something or at least that the IRS won't believe everything is on the level. Whether it is or not doesn't change how stressful an audit can become.

One thing you can do to avoid an audit is to understand what red flags the IRS looks for. They do not have the time to audit everyone, so they target individuals who meet certain criteria. Some of the main things they watch out for include:

1. Businesses that repeatedly report losing money. In a five year stretch, if you report a loss more than twice, that's a red flag. Losing money in the majority of cases makes the IRS wonder if you have doctored the books to look like you lost money when you actually did not.
2. Excessive entertainment, travel and meal deductions. You can deduct many of these things, and perhaps your reports are completely legitimate. This is still a red flag for the IRS, though. They may think that you are making up deductions or that you're using deductions for personal travel, meal and entertainment expenses. It's fine to take business trips, but you cannot simply write off every trip you take merely because you own a business.
3. Filing late or missing deadlines. You definitely want to file on time, every time. You need to know what the deadlines are and if they're different for your business than they would be if you were just filing as an individual. While paying taxes late does happen accidentally, if you do this repeatedly, the IRS is going to wonder why. As with losing money, that repetition really raises a red flag.
4. Saying that you used a vehicle for nothing but business. You get to pick a percentage when you file for use of a business vehicle. If you pick 100%, the IRS may wonder if that's possible. Are you using your personal vehicle and writing off trips that have nothing to do with business? Or do you actually have multiple vehicles, with one that you save only for business?

Business owners often have to perform a wide range of tasks for the company that they start and run. While you may not have had any experience with financial record-keeping before you started the business, you may start to perform minor accounting tasks as a way of keeping costs low for your company.

Software can make it easy to track account balances and withhold the proper amount of employment taxes. It's only natural that those who handle their own financial records may also decide that filing their own taxes for the business would be an affordable alternative to paying hundreds of dollars for professional accountants to prepare the tax return.

Delinquent tax debt can be a heavy burden for you to bear. The IRS can put a lien on your home or garnish your wages. They can often do this automatically or without the use of a court order. They can also revoke your passport.

If you have what the IRS calls “seriously delinquent tax debt,” the IRS can ask the state department to revoke your passport or deny an application or renewal. Until you can satisfy your debt, you will not be able to use your passport for international travel.

Businesses and residents of Washington may have to start paying more income taxes. A recent decision by the Washington state Court of Appeals has left the door open for a local income tax.

A 1984 law prohibited cities and counties from collecting net income tax. The court has now ruled that law unconstitutional. Lawmakers will try to decide if Washington needs a new law banning local income taxes.