Small business owners are typically involved in the running of the day-to-day operations of their companies. As the owner you are focused on attaining new clients, improving the level of customer services and keeping the business afloat. Surprisingly, when the tax season creeps in the business’s processes come to a standstill to cater for filing tax returns.

Knowing the importance of the exercise, many businesses drop everything to prepare for tax preparation. The prospect of undergoing an audit is daunting to any company, and nobody wants to carry the burden of proof with the authorities.

Red flags that may lead to an audit.

Multiple Net losses.

When your company reports losses thrice in five years, there is a likelihood of a review. These losses raise eyes especially in sole proprietorships where funds can quickly mix with personal finances. To avoid an audit, you may have to revisit your income and claim deductions with receipts without being excessive.

Filling returns late.

Constantly filling tax returns past the recommended period not only attracts penalties but also triggers unwanted attention. When it comes to tax and authorities, it is best to stay out of their radar lest you provoke scrutiny. Filling on time will help you avoid unnecessary pitfalls.

Uncharacteristically high salaries.

Small businesses giving the employees shares must offer reasonable salaries. Higher earning individuals who may at the same time be shareholders may attract the auditors’ attention. The problem is not always with the number of money employees are earning but rather how the business is making more and more year after year. Familiarize yourself with salary allocation metrics for your company and offer employees appropriate amounts to avoid scrutiny.

Many deductions.

Not all small fees incurred qualify as deductions. Be careful of what goes on record as business expenditure. Compare your deductions from each year and consult an accountant for guidance to make sure you report a reasonably standard figure. Follow the golden rule for an inference that expenses must be “ordinary and necessary” in your line of work.

Cash transactions.

If your business mostly deals with cash transactions, there is a very high chance to cause alarm. Cash transactions make it hard to trace the origin of money and where it is going. In most cases using cash as a mode of payment is considered money laundering. It is recommendable to use credit and debit card for transactions but if cash is your go to, then make sure your books are clean and every coin is traceable.

Large donations to charity.

If a business suddenly out of the goodness of its heart gives away large contributions to charity or community projects, the income shift tends to attract an investigation. In situations where a company can get out of paying taxes by giving to charity, businesses may use the loophole to evade taxes; abusing the tax code will merit for an audit. To avoid an audit as a result of tax abuse, make sure your donations are reasonable.

You do not want to be at the mercies of government auditors as they turn your company inside-out trying to establish accuracy. It is essential to make sure you do not give the relevant authorities a reason to show up at your company’s doorstep. If you are looking for a reliable accounting firm to keep your records in check, check out and see what they have in store.

Factors That May Lead to Auditing of Small Businesses

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