For many business owners, the threat of an audit is a daunting prospect. A recent survey performed last year by Xero, as summarized here polled 400 accountants and compiled the most common mistakes that a small business owner can make that are known to trigger an audit.
According to the study, the third most common way to trigger an audit with an 11% response rate from CPAs is deducting a home office. This means you’ve turned a room in your home into a home office, and you’re paying yourself rent – which you then deduct as an expense. It’s a controversial deduction and more often than not will draw the attention of the IRS and trigger an audit.
Second on the list, with 27% of CPAs supporting it as a major cause of audits, is misidentifying workers. An independent contractor and an employee are two different types of workers – notably
made different by whether they work for multiple employers independently or just one – and misidentifying an employee as a contract worker means you may actually owe that employee a
higher wage and overtime, benefits, and back taxes. You should always check with your trusted advisor to ensure you have classified your employees correctly to avoid triggering an IRS audit.
Finally, with 43% of CPAs naming it, the most commonly cited way to trigger a business audit is with excessive deductions. It can be tempting to deduct everything that might possibly be related to the function of your business, but not every purchase can be deducted and taking too many deductions can draw the attention of the IRS, causing an audit as they double check all of those deductions.
Of note, 63% of the CPAs surveyed stated that they feel it’s best to have contact with an accountant all year, instead of just when tax season approaches. That way when taxes are due, there are no surprises and you don’t accidentally stumble into one of the three most common audit triggers. It’s important to have frequent check-ins with your trusted advisor to protect yourself and your business.
Call Accounting & Tax Solutions today at 303-232-8300 and let us help you protect your business from these common mistakes!