Understanding IRS Audit Triggers: How To Keep Your Business Compliant
Receiving notice of an IRS audit can be unsettling for any business owner. While audits do not always indicate wrongdoing, they often require significant time and documentation. By understanding common audit triggers, businesses can take proactive steps to reduce risk and remain fully compliant with federal tax laws.
What Triggers an IRS Audit?
The IRS selects returns for audit using a mix of algorithms, industry comparisons, and random checks. However, certain behaviors or entries can draw extra attention.
Here are some of the most common audit triggers for businesses:
Deductions That Don’t Match Income
If your business reports a low income but claims large deductions or losses, that’s a red flag. For example, claiming high expenses for travel, a home office, or a luxury vehicle without strong documentation may prompt further review.
Cash-Heavy Operations
Businesses that deal mostly in cash, such as salons, car washes, or restaurants, often face more audits. These industries have higher risks of unreported income, and the IRS watches them closely.
Worker Misclassification
Misclassifying employees as independent contractors is a common problem. If the IRS believes you’re avoiding payroll taxes, penalties can be severe. It’s important to understand the difference and follow the rules.
Round Numbers and Math Errors
Returns with lots of round numbers, like $1,000 or $10,000, may signal estimates rather than real figures. Even small math mistakes can draw attention. Always check your numbers for accuracy.
High Meal, Travel, or Entertainment Expenses
These expenses can be legitimate, but they’re often abused. Keep clear records of who, what, where, and why, and only deduct business-related costs.
Home Office Deductions
You can only claim a home office deduction if you have a dedicated space used exclusively and regularly for your business. Claiming this deduction without meeting those rules may result in a closer look.
Missing or Unreported Income
If you received a 1099 or other income form, the IRS got one too. Failing to report income that’s already on record with the IRS can lead to penalties, even if it was an honest mistake.
How To Lower Your Risk of an Audit
You can’t fully avoid the possibility of an audit, but you can take steps to reduce your risk.
- Keep detailed and organized records, including receipts, logs, and invoices
- Work with a qualified accountant or attorney who understands business filings
- Claim only those deductions you can clearly support with documentation
- Review your return for typos and math mistakes before filing
- Keep year-to-year reporting consistent. If you have major changes in revenue or deductions, make sure you can explain them
What If You’re Audited?
First, don’t panic. The IRS will tell you what they’re looking at and what documents they need. Respond promptly and stay professional. Most audits are limited in scope. Still, having a tax attorney on your side can help you protect your rights and avoid costly missteps.
Contact Our Legal Team Today
At Coleman Jackson, P.C., we help businesses across Texas stay tax compliant and respond confidently to IRS audits. Whether you’re looking to reduce audit risk or have already received a notice, our team can help.
To discuss your situation or ensure compliance, contact our office today to schedule a consultation.
This law blog is written by the attorneys at Coleman Jackson, P.C., located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes only. It does not create an attorney-client relationship between this law firm and the reader. You should consult with legal counsel in your geographic area regarding any legal issues affecting you, your family, or your business.
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