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Roulet Law Firm, P.A.

5 Red Flags That May Trigger an Audit and What You Can Do To Protect Yourself

Every year, countless businesses get hit with an audit that they did not see coming. If your business gets audited, it can cause significant stress, time and money.

There are plenty of red flags that can trigger an audit. Many common things to avoid such as not mixing personal and business finances and not deducting things without receipts, are common sense. However, there are many more items that could cause the IRS or the Minnesota Department of Revenue to give you a second look. Here is a list of some of the most common red flags and how to avoid them.

  1. Classifying employees as independent contractors. It is tempting to want to treat employees as independent contractors as it saves you the time and expense of preparing and filing payroll tax returns and paying payroll taxes. However, 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. The IRS has a set of factors to decide whether someone should be treated as an employee or a contractor. Click here for the list of factors the IRS considers.
  2. Home office deductions. Even though the home office deduction has been allowed under the law for a long time, many clients choose not to take it because of the likelihood of an audit. The IRS has loosened its grip on the home office deduction in recent years. 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. This even applies to deadlines such as quarterly estimated taxes. You are filing your quarterlies right? Another audit trigger is missing a required filing. Many individuals and small businesses can miss required filings such as use tax. In fact, the Minnesota Department of Revenue is heavily auditing the use tax right now. Miss a filing and you are far more likely to trigger an audit.
  2. Travel and entertainment. Keeping a receipt is not always enough when it comes to deductions for 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. It is even more important for self-employed and small business owners to seek competent tax and legal help to minimize the chances of being audited.

To learn more about minimizing your taxes, visit our free video tips page here.