What are some red flags that can trigger a small business audit?
We're frequently asked if there are any so called "red flags" that would trigger an audit. The shrewd answer is there really are not any such "red flags". Some times things don't look proportionate on a tax return. For example, although you are allowed to deduct up to 50% of your earned income as charitable contributions, if you actually did so on your tax return, it might make it look a little disproportionate, and act as a red flag. The other things are mathematical errors, perhaps inputting your social security number incorrectly on your tax return, could increase your likelihood of being scrutinized, acting as red flags. Sometimes people ask us if hobby losses for example, the disallowance of business deductions could lead to an audit. The answer is, it could, but it's not absolute. A hobby loss is of course when you have a business that shows a number of years without any taxable income. While it might not trigger an audit it might result in a disallowance which is kind of an audit. Things to look out for, possible red flags, are disproportionate expenses. For example, if you have a small business that grosses a $100,000, but yet you're spending $80,000 on meals and entertainment, it could look disproportionate.
