Running a small business can be rewarding, fulfilling and potentially very lucrative. However, small business owners bear the burden of risk when mistakes occur regarding business operations and tax situations.
One fear-inducing possibility for many small business owners is the implication of an IRS tax audit. The IRS thoroughly examines businesses that it suspects of suspicious activity or misreporting of finances, so it is in the best interests of all small business owners to remain aware of some common situations that might lead to a tax audit.
Misreporting income
Business owners report their annual income on a Schedule C form during tax season every year, but many factors can lead to a mistake that causes the reported income to be inaccurate. New entrepreneurs especially might make the mistake of miscalculating income or overlooking a few figures from earlier in the year.
Excessive expenditure
It is normal to report certain expenditures as business expenses, but doing this excessively may raise some red flags. The IRS provides resources that business owners can use to determine whether or not an expenditure is a common business expense.
Successive losses
It is perfectly normal for a business to claim losses in certain years, but multiple successive years of losses may lead the IRS to suspect that a business is illegitimate. It is important for business owners to maintain accurate documentation that will clear away any such doubts in the event of an audit.
Knowing what types of situations might lead to a tax audit can help business owners avoid unwanted attention from the IRS. There are times when an audit situation is unavoidable, so entrepreneurs must remain prepared to defend the validity and financial reputation of their businesses.