Small Business Tax Audits

Small Business Tax Audits

Gregg Wind (Partner, Wind Bermer Hockenberg, LLP) gives expert video advice on: What are some red flags that can trigger a small business audit?; Do small business owners get audited more than individual employees?; If I'm audited, will the auditor come to my place of business? and more...

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.

Do small business owners get audited more than individual employees?

We get asked a lot if small business owners are audited more than individuals, and the IRS does publish audit statistics and we have seen that the inclusion of a schedule C which is a sole proprietor business in the tax return could elevate the incidence of audit a little bit.

If I'm audited, will the auditor come to my place of business?

If you're audited, it doesn't have to be a scary experience. The important thing is to have your records well organized and to have things ready to present to the auditor. They can come to your place of business. If you engage somebody like an accountant or an attorney to handle the audit for you, you can often request that the auditor show up at your advisor's office instead. Even in those cases, they may still ask to see your place of business just so that they can visualize what your setup is like.

Do I need a CPA or lawyer if I'm audited?

If you're audited, it might behoove you to hire a CPA or an attorney to represent you. Those of us in the profession have handled audits before, so we can generally do so more expeditiously, in a shorter amount of time. But taxpayers can certainly represent themselves, and it does not have to be a frightening experience. As long as you are maintaining your books and records conscientiously, you should be able to present whatever is requested. If the auditor, if the revenue agent is making what you see as excessive demands for production of documents, or maybe the audit is going on longer than you would have thought; anything more than a few weeks is probably a long time unless there are specific reasons for that long wait; but if you have a sense that things are getting a bit over your head or perhaps technical matters are being quoted that you don't understand, it might be a good idea to bring in a professional at that point.