What Are The Chances of an IRS Audit?

What tax deduction is likely to get a small business audited?

Staff Sacramento Business Journal

What type of tax deduction is most likely to get a small businesses audited?

“No one deduction versus another will automatically trigger an IRS audit. Rather the IRS compares taxpayers’ expenses to a variety of statistical data it has compiled to see if the expenses are in line with what is reasonable and customary for the type of business the taxpayer has. If the expenses are outside of these statistical ranges, the return could be flagged for audit. Since 2001, IRS audit rates have quadrupled, and the volume of notices to taxpayers have gone up sevenfold. … The best defense against an audit is to keep accurate books and records for your business and to maintain the required documentation to support your deductions. Taxpayers lose in audits because they do not have sufficient documentation to support the deductions.”

— Steve McCormick, CPA, Scott & Baldwin CPAs
“The IRS has recently announced that it will be paying special attention to the returns of small contractors, especially those filed on Schedule C of an individual’s Form 1040. Thus, all small contractors, whether they file as a stand-alone business or as part of an individual return, should make sure that they have proper documentation for all expenditures. Particular areas of emphasis include car and truck expenses; travel, meals and entertainment; supplies; and repairs and maintenance.”

— Mark A. Bellows, CPA, partner, Gallina LLP
“Deductions that can be ‘matched’ such as salary, rent paid (and) consulting expenses are an easy audit question, if they are significantly different from the reporting mechanism (such as W-2s, 1099s, etc.). Also, expenses that seem large in comparison to gross revenue, after giving consideration to the type of business (such as extraordinarily large automobile expense for a small fixed-retail shop.) Also, those who have cost-of-goods-sold greater than gross revenue are likely to be given a second look. Lastly, obviously ‘rounded’ amounts, such as $20,000 and $310,000, are a dead giveaway that support may be lacking ; this is particularly evident when all or several deductions are nice round numbers!”