As a small business owner, you don’t have to be doing anything wrong to worry about going through an audit. After all, audits can be random, time-consuming, and even costly.
Luckily, having the right partner can make all the difference! Beyond helping you through an audit, a monthly accountant can also ease your mind by answering any questions you have before, during, and after.
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. Since then, we’ve advised plenty of small business owners on these questions about audits that keep them up at night:
- What are the different types of audits?
- When do small businesses get audited? Is there a busy season?
- What triggers an IRS audit for small businesses?
The Different Types of Audits
When people talk about audits, they’re typically thinking about income tax audits – but don’t forget about the other types of audits!
Here are all of the different types of audits to consider:
- IRS income tax audits
- State income tax and sales tax audits
- Insurance audits (general liability & workers’ compensation)
- State licensing audits
Next, we’ll address how often you may be subjected to these audits.
When Small Businesses Get Audited
Is there a time of year when most audits happen: an audit busy season? Nope! The IRS, State government, and insurance companies perform audits year-round.
IRS Tax Audits
Let’s start with income tax audits (which is what most people associate with the word “audit”).
The IRS audits between 1-3 percent of business income tax returns. They can occur at random, but there are things that can trigger an income tax audit, such as underreported income. (We’ll get into the red flags in the section about audit triggers.)
State & Insurance Audits
Insurance and licensing audits aren’t random, and they aren’t nearly as time-consuming or costly as IRS audits.
You can expect an annual insurance audit to ensure your rate fits your risk level, plus a State licensing audit every 1-10 years (depending on which licenses you hold).
There are also sales tax audits from the State. They also usually occur at random (although they’re more likely if you’re filing your own sales tax with errors or aren’t paying when you need to), but the State has a goal of auditing every business’s sales tax records every three years.
(The rest of this article goes back to focus on the star of the show: IRS income tax audits.)
Triggers for an IRS Tax Audit
As mentioned in the section above, IRS income tax audits can occur at random, but there are some things that can trigger them, including:
- Making significantly more income than the average person.
- Forgetting to claim the income shown on your Forms W-2 or 1099.
- Large charitable donations compared to the averages for your income level.
- Claiming the home office deduction.
- Losses from the rental of real estate.
- Business meals, travel, and vehicle expenses.
- Claiming 100% business use of a vehicle when you do not own another vehicle.
- Having business losses too many years in a row.
- Businesses that primarily transact cash rather than checks or credit cards.
- Foreign bank accounts.
- Cash transactions exceeding $10,000.
- Other deductions that are high in comparison to the taxpayer’s income.
Learn more about these red flags here.
There’s one last trigger that we should address since there are three different types of income tax audits: mail, office, and field audits. The IRS will typically start with mail audits, but if there are too many red flags adding up or if you don’t comply, that will trigger the more invasive audits.
Get Professional Audit Advice & Support!
Audits can seem scary, but partnering with a monthly accountant at CSI means that you’re represented. Other accountants either charge extra or don’t offer this level of support at all!
Now that you know about the different types of audits, when audits occur, and what triggers them, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about how an accountant can help you with an audit.
