Proper bookkeeping is crucial for business owners, but poor record-keeping can invite unwanted IRS attention. At TaxMagic, we help businesses avoid common mistakes that could lead to an audit. Here are some red flags to watch out for in your bookkeeping.
1. Large or Unexplained Deductions
IRS scrutiny may result from claiming abnormally large deductions without supporting paperwork. Always keep receipts and invoices for business expenses, especially for meals, travel, and entertainment. Don’t pretend that personal costs are relevant to business.
2. Inconsistent Income Reporting
If your reported income doesn’t match your industry or seems inconsistent, it can raise suspicion. Ensure your income statements align with bank deposits, invoices, and credit card records.
3. Claiming Losses Year After Year
If your business shows losses over multiple years, the IRS might question if it’s truly for-profit. Be ready to provide evidence that your business is legitimate. TaxMagic recommends working with a tax expert to avoid overstating losses.
4. Unusually High Charitable Contributions
Excessive charity deductions out of line with your business’s income could attract IRS attention. Always have proof of donations, and keep personal and business donations separate.
5. Failing to Report Foreign Income
Costs may result from failing to report foreign income. If your business operates internationally, make sure all foreign transactions are properly reported to stay compliant with IRS rules.
6. Rounding Numbers Instead of Reporting Exact Amounts
Rounding numbers instead of reporting the exact figures can be a red flag for the IRS. Ensure your financial statements reflect precise amounts, not estimates. Using accounting software can help maintain accuracy.
7. Unreported Tips and Cash Payments
If your business handles cash or tips, be sure to report them accurately. An audit may follow failure to comply. Implement a system to track these transactions to ensure proper reporting.
8. Misclassifying Employees as Independent Contractors
Tax problems may arise from incorrectly categorizing personnel as independent contractors rather than employees. Ensure your employee classifications follow IRS guidelines to avoid penalties and back taxes.
9. Failing to File Tax Returns on Time
Missing tax filing deadlines can lead to penalties and IRS scrutiny. If you are unable to file on time, request an extension. At TaxMagic, we recommend staying on top of deadlines to avoid unnecessary issues.
