Getting audited by the IRS is a HUGE HASSLE that no one wants to deal with.
The good news is… by working with a skilled accountant, you can significantly reduce your chances of being audited.
From choosing the right tax status to ensuring accurate and compliant return preparation, accountants play a crucial role in protecting your business from unnecessary scrutiny. In this article, we’ll explore four key strategies that CPAs use to minimize audit risk, ensuring your business stays on track and out of the IRS’s spotlight.
1. Choosing the Right Tax Status
Many people don’t realize that certain business structures are less likely to be audited than others. They also don’t know that sole proprietorships or LLCs filed on the owner’s 1040 are the most likely of all business types to be audited. A good tax advisor can evaluate your business’s financial situation and not only make recommendations that save you taxes but also use tax elections to reduce exposure to IRS scrutiny.
2. Lowering your DIF Audit Score
Errors on a tax return are one of the most common triggers for an audit. The IRS uses computers to give every tax return a DIF score. The Discriminant Information Function (DIF) score for your return will get worse for items reported on unusual lines, checkboxes you forgot to check, questionable expenses, and incomplete forms. This score is a key factor in the IRS’s audit selection process. Skilled accountants ensure that your tax returns are prepared accurately and in compliance with current tax laws and IRS requirements. Their attention to detail helps prevent miscalculations, missed questions, and misclassification of income or expenses. Getting these things right decreases your chances of getting audited!
3. Industry-Specific Knowledge
Some industries face higher audit risk than others. For instance, cash-intensive businesses like restaurants and service providers are more likely to be audited. Accountants with industry-specific experience can alert you to help ensure that your business’s practices, income reporting, and expense classifications align with industry norms, reducing the likelihood of an audit. For instance, it would be strange for all the deposits to a restaurant to only be from debit and credit cards. The IRS can compare these numbers, and they often do trigger an audit.
4. Avoiding Red Flags and Unusual Claims
Certain deductions and credits are more likely to be scrutinized by the IRS. Tax preparers experienced with businesses understand the limits and guidelines for common deductions, such as home office expenses, vehicle use, and charitable donations. They ensure that these claims are well-documented, reasonable, and in line with industry standards. Unusual claims or excessively high deductions compared to income often raise a red flag, making the return more likely to be audited.
If you legitimately have a larger than usual deduction or credit, your accountant can offer insight on potential ways to reduce the audit risk for that item and on whether claiming the deduction or credit is worth the higher audit risk.
Conclusion
While no one can guarantee a 100% chance of avoiding an IRS audit, working with a skilled accountant can significantly reduce your risk. By choosing the right tax status, lowering your DIF score, utilizing industry-specific knowledge, and avoiding common red flags, your accountant can help protect your business from unnecessary scrutiny. These four strategies are crucial in keeping your business on the IRS’s good side, allowing you to focus on what matters most—growing and running your business without the added stress of an audit. Working with a Bearden Stroup or another solid accountant on these proactive steps now can save you loads of time, money, and headache down the road.