How does the IRS Detect Faulty Small Business Reporting?

The process of small business reporting on your taxes can be a bit confusing. At some point, there is a chance that you will make a mistake on your business return. Here are the basics of how the IRS detects faulty small business reporting.

Audits

The official way that the IRS will detect faulty small business reporting is to perform an audit. An audit is a financial process that involves an agent from the IRS going through your tax return with you. They will go over any areas of concern on the tax return and want proof of everything that they do not have. They will go over all of your books, your receipts and anything else that may help them.

The process of an audit is usually very stressful for the business owner and most people want to avoid them at all costs. Usually, an audit is triggered when red flags are reported small business tax return. Things that do not look like they belong on tax return will increase the odds of your business being audited. Here are a few common red flags that the IRS looks for that could trigger an audit.

Gifts

One of the most common red flags on a small business tax return comes in the area of gifts to clients. Many business owners do not understand how this rule works. Many businesses file their tax return and include a tax deduction for $2000 for gifts to clients. While this could technically be possible, it usually looks very suspicious to the IRS. According to the rules, you can only deduct $25 for each client that you give a gift to. Even if you gave them a check for $10,000, you can only deduct $25 of that on your taxes. Therefore, to the IRS, a figure of $2000 in this area tells them that you claim you gave gifts to 80 different clients. While some businesses may give that many gifts, it is rare when you are a small business. This could trigger an audit from the IRS.

Charitable Contributions

Another similar area is dealing with charitable contributions. Charitable contributions can be deducted, however, they require documentation. If the amount of the donation was over $250, you are going to have to provide the IRS with a letter or receipt from the organization. The organization that you give the money to has to be a qualified charitable organization as well. If they are not qualified, your deduction will not be valid. 

No Receipts

Not having proof of all of your expenses is a recipe for disaster when it comes to business taxes. Many business owners do not keep receipts for expenses that are less than $75. While you are not technically obligated to, it is much simpler if you do. Otherwise, you will have to keep a separate transaction log with all of the details in it. A receipt is much easier to handle.

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