Operating a small business is challenging enough without the stress of an IRS tax audit; knowing what issues and practices trigger an IRS tax audit can help you avoid one.

First, how does the IRS choose returns for an IRS tax audit? Among the reasons: The IRS finds that a return varies too much from norms they have developed for similar returns, or the business has had transactions or interactions with another business being audited, such as a customer or investor.

Issues in the Tax Return for Your Small Business That Could Trigger an IRS Tax Audit

Mismatched or underreported income – The income you report doesn’t match what third parties report, for example, on a Form 1099-NEC, or your reported income is consistently lower than industry standards or what you reported for previous years.

Operating at a loss – You report losses year after year, which suggests a hobby rather than a business, or you claim losses inconsistent with your business size or norms for your industry.

Suspicious deductions – These include business expense deductions, such as travel, meals, and entertainment, that are disproportionately high compared to your revenues; claiming a large proportion of your home as your home office; and high amounts for utilities or repairs to your home office.

Misclassified employees – You are paying individuals who should be classified as employees as independent contractors.

Issues With How You File Your Tax Return or Pay Your Taxes

• You consistently file your tax return late.
• You have a history of unpaid taxes or underpaid quarterly estimates.
• Your return contains too many round numbers, suggesting estimated figures.
• Your return includes complex, difficult-to-understand transactions.
• You have been audited before, and the IRS has found significant issues.

Avoiding these IRS Tax audit triggers for small businesses and maintaining complete, accurate records should decrease your chances of an audit by the IRS. And if your return is chosen for audit, you will be in a good position to answer any questions. While responding to an IRS tax audit on your own is possible, we don’t recommend doing so. The experts at Highland Tax Resolution can advise you on the best options and strategies in your case.