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5 Red Flags That May Trigger an Audit for Small Business Owners


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2/17/2014
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Every year, countless businesses get hit with an audit that they did not see coming. Here is a list of some of the most common red flags and how to avoid them.

  1. Classifying employees as independent contractors. The IRS is on the lookout for businesses that classify employees as contractors. If your business is found to have misclassified contractors, you can be liable for the back payroll withholding and penalties.
  2. Home office deductions. The IRS has loosened its grip on the home office deduction in recent years. However, you should still be especially careful if you are claiming:
  • A deduction for a significant portion of your home.
  • A deduction for both a home office and a rented office
  • A lot of expenses for utilities
  1. Missing a filing deadline. Missing any tax filing deadline or an actual filing can increase your likelihood of an audit. The Minnesota Department of Revenue is particularly auditing for use tax compliance.
  2. Travel and entertainment. You should keep a detailed record of the location, who was in attendance and what the gathering was for.
  3. Being self-employed. Being self-employed or a sole-proprietor makes you a bigger target for the IRS and the Minnesota Department of Revenue.

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