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Audit red flags the IRS looks for

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?

The key here is to remember that these are red flags. They don't mean you definitely did anything wrong. With a vehicle, for instance, 100% business use is possible. But that does not mean the IRS will not check into it more closely.

If they do notify you that they're starting an audit this year, make sure you are well aware of your rights and the legal steps you need to take to get through this process.

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