Why does the Internal Revenue Service audit some businesses and leave others alone? Sometimes it’s only chance, but often it is certain financial practices that can increase the chances of an IRS letter of audit arriving in your mailbox.
- Your business drops off significantly from prior years.
- Expenses increase dramatically without an obvious reason for it.
- Expenses seem unreasonable – like a business lunch that requires airfare and a week’s stay at a resort.
- You’re a sole proprietor or your business is an S corporation.
- You take a large amount of dividends instead of salary, saving on certain taxes because of the difference in tax treatment.
- You run your business from a home office. Be prepared to prove that your workspace and equipment are used exclusively for business, if that’s what you claim on your tax returns.
- You wrongly classify employees as independent contractors, also known as Form 1099 contractors. One potential example of incorrect classification: a contractor who works only for you.
- You’re unlucky. The IRS and some local tax departments choose many audits at random.