Ask the Advisors: IRS Audit Triggers & How to Avoid Them

Chris Haas, CPA, Tax Shareholder

Q: What could trigger an IRS audit and how can I reduce my chances?

While there is no guarantee for avoiding an Internal Revenue Service (IRS) audit, there are some steps you can take to reduce your risk of being examined. Unreported income is often the number one red flag that triggers an audit, but excessive business deductions are a close second. If you claim large deductions on your return, the chances of being audited increases significantly. Deductions likely to increase IRS scrutiny include home office deductions, non-cash charitable contributions, unreimbursed business expenses and claiming the business use of a vehicle at 100 percent. To ensure your business is meeting documentation and substantiation requirements established by the IRS, you should always maintain adequate records of business expenses. If you have expenses for travel, entertainment, gifts or transportation, then you MUST maintain documentary evidence showing the details of the amount, date, place and essential character of the expense. Documentary evidence can be in the form of receipts, canceled checks or bills supporting your expenses. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. For example, if you are paying business expenses with a credit card, the credit card statement itself is not sufficient. You should still retain copies of physical receipts. Otherwise the IRS could disallow the expense entirely. Business owners should generally keep records supporting business deductions for at least three years from the date you file the tax return on which the deduction is claimed.

How to Prove Certain Business Expenses

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Chris Haas, CPA, is a Tax Shareholder at Doeren Mayhew, and can be reached at 713.860.4206. For more information on documentation and substantiation requirements, contact our tax group today.