Biz tip of the week: Audit risk factors

Barbara Weltman, an attorney and guest blogger for the SBA, offers five factors that impact audit risk for small businesses:

Entity type — An S-corporation or partnership — regardless of income or other factor — had only a 0.4 percent chance of being audited in the government’s fiscal year in 2014. A sole proprietorship with gross receipts between $100,000 and $200,000 had a 2.4 percent audit risk.

Income — The amount of gross receipts (earnings before any deductions) impacts the audit risk of sole proprietorships. While it doesn’t seem fair, the more you make, the greater the risk.

Location — Due to staffing, different IRS offices conduct more audits than others. Just be prepared by carefully tracking your income and expenses.

Deductions — The IRS looks carefully at travel and entertainment expenses deducted for business to make certain they are legitimate and adequately substantiated. IRS computers are purported to select returns of businesses that take unusually high deductions relative to their income. You should take every deduction to which your small business is entitled but keep the required documentation.

Type of business — Cash businesses such as beauty shops, car washes or laundromats are suspected of omitting income because there is little or no paper trail. Review the IRS audit guide specifically for cash intensive businesses (http://tinyurl.com/m77ldjl) to learn what to do to create audit protection if you are a cash business.

Some believe that taking a home office deduction is an audit red flag. There are no statistics to show this is true. Since over half of all businesses in the U.S. are home-based, it’s not likely that the IRS is going after all of them.

No one thing triggers an audit. Retain all receipts and tax papers (even if scanned into your smartphone or desktop), conscientiously record income and expenses, and work with a tax professional.