Which Factors Trigger IRS Audit and its Related Considerations in Tax Returns?

by Stuart Iles Partners Tax Consulting

Several instances state the IRS has to conduct audits for the businesses in Hobart to make sure they are regular with tax returns and in a legal manner.

Most businesses in Hobart are likely to haunt the IRS audit possibility, but there are some factors contributing to this very risk. For instance, did the business processes be implemented abundantly for capturing the needed documentation like the withholding and withholding taxes? Or else, did the business remain consistent with its ongoing accounting methods?
The frequent target for IRS audits is the large corporations, but there are several other entities like the sole proprietors earning an income of about $1 million and more which are directly under the close scrutiny of IRS. The smaller sole proprietors, partnerships, and smaller corporations have less possibility to face the direct IRS audits and, but the missteps are sure to increase the audit likelihood.

The Factors Triggering An IRS Audit

Several reasons call for the business tax returns in Hobart to be flagged for IRS audits, which are pointed out below.

i. High Deductions For Lavish Meals And Entertainment

The IRS take steps to track the typical level of such specific expenses for each of the business category. A red flag is raised right when the expenses of meals and expenses are known to be expensive. If the business fails to provide solid and sufficient documentation, like the people’s names in attendance, and the exact business reason for the activity or meal, then the expenses might be disallowed.

ii. Big Changes Noticed In Annual Income And Expenses

The IRS seeks out anomalies and the huge shift in expenses and income are likely to trigger the audits. While the big shift in numbers could contain legal business reasons, the businesses should be prepared for getting them documented.

iii. Claiming The Business Losses Ranging From Several Years

As per the expectations of the IRS, it is unlikely for the start-up businesses to show a profit for some years. Nevertheless, when a business is consistently claiming the losses for several years, then IRS will surely investigate to make sure of the validity of deductions, and whether the business is actually a viable venture despite being opposed to a particular hobby.

iv. Cash-Based Businesses Are Being Operated

The IRS did discover that the cash-based business owners have the tendency to overlook the income which must be reported. The result is that businesses like restaurants, hair salons, convenience stores, laundromats, and car washes are likely to be at higher risks for an audit.

v. State Sales and Using Taxes

Now more states are getting sales audited and using the tax filings. They are in fact seeking the help of the internet companies for collecting sales tax. Failure to reporting and paying the state sales and using sales tax are likely to trigger the states for reporting the discrepancies to the IRS.

vi. Independent Contractors Existing on Your Payroll

With the workers being classified as independent contractors, apart from the employees helps in saving on payroll taxes and related benefits. Nonetheless, when the count of independent contractors is large, then it is an instance to flag a state audit. In case, the state can discover the workers have been misclassified, then IRS will be notified and will result in the audit.

vii. Mathematical Errors and The Rounding Numbers

Lacking attention to details results in reporting errors. With the lack of a few items in documentations, there could be temptations to the "guesstimates" and bring up a list of rounded numbers. The IRS is aware of it, and could particularly look for expensive items and income rounded in $100's multiple times.

viii. Failure to File or Submit the Incomplete Returns

Every business in Hobart must file tax returns and even report the losses. If it fails to do so or does not file tax returns for a few years, and then comes up again for filing, then the IRS will want to find out the reason. Similarly, if you provide incomplete tax returns, then it will surely provoke the IRS to ask questions.

So by now, you must be clear with the instances when the IRS becomes strict with audits. It is necessary to keep the accounts and books exceptionally clean and updated to abide by the legal norms. So, the wise decision to ensure everything is transparent is by hiring the accredited accountants and bookkeepers and working with the licensed tax agents from the reputed accountancy firm in Hobart.