By Jessie Seaman, Special for USDR
An expert offers advice on how to decrease the odds your business will get singled out by the IRS.
The last thing any small business owner wants after filing their taxes and getting back to business as usual is to find out they’re going to be audited. But according to one tax expert, the IRS looks for certain red flags when determining which tax returns to audit. Knowing that, there are a few things small business owners can watch out for when completing their tax return this year to minimize their chances of being audited.
Jessie Seaman is a licensed tax professional with the Tax Defense Network (taxdefensenetwork.com), which provides financial advice and tax resolution services around the country. The expenses below are the most highly “fudged” and the IRS knows it, Seaman says, so keep detailed records and receipts for these particular categories:
- Home office deduction: The space must be used exclusively for business; the key here is exclusive. If the space is also used by the family for school projects, online shopping, guest room, etc. then the deduction is not available.
- Meals, travel, and entertainment: These are subject to strict limitations and require a receipt if over $75. Meal, travel and entertainment expenses must match up with the nature of the business.
- Claiming 100 percent of vehicle use: Doing this and then deducting all related expenses sets off bells, especially if the taxpayer files on schedule and does not have a second car for personal use.
- Hobby vs. business: If your business loses money every year, the IRS will view the activity as a hobby; no losses may be taken for hobbies. A business must net positive income at least three out of the last five years to be considered a business that may take a loss against other income.
- Losses on rental property: If the taxpayer is not a real estate professional, meaning more than 50 percent of their work in the last year or 750 hours were spent in this field, no loss may be taken on rental property. If you are not a real estate professional, then be wary of claiming you are simply because you rent a property or two.
According to Seaman, small businesses are now the target of IRS audits more than ever before. “The IRS has switched its focus from large corporations to smaller business entities like sole proprietors, LLCs, partnerships and S-corps,” Seaman says.
Also, the IRS is conducting more and more automated audits of mid-range income individuals and businesses, Seaman says. The cost of field audits is significantly higher than automated audits and takes much longer. The IRS is shifting examination resources from large corporations and individuals with income over $200,000 to small businesses and self-employed taxpayers because the cost is much less and the work is mainly automated.
“Just because the IRS is behind and doesn’t have a budget to hire new auditors doesn’t mean taxpayers have less to worry about,” Seaman says.
Seaman is a certified enrolled agent and teaches business law at the University of Phoenix’s business master’s program. She leads the Tax Defense Network’s business tax team. Jessie received her law degree from Florida Coastal School of Law and is a member of the Florida Bar Tax Section. The Tax Defense Network’s team of licensed tax professionals, enrolled agents, attorneys and CPAs has resolved more than $120 million in tax debt. The Tax Defense Network is A+ rated by the Better Business Bureau.