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That IRS business audit can be a bit of a slippery slope

If there’s one central reason why the Internal Revenue Service seems to often target privately held small and mid-sized businesses for audits, it might simply be that they are far easier to probe than is the case with gargantuan business entities.

In other words, one IRS examiner or a small team of investigators can with relative ease conduct their evaluation of a comparatively small company.

If you’re the owner of such a business and have received an audit, be ready.

That is the candid advice offered by an online primer focused on IRS business audits, which points out that “unsuspecting business owners can get caught in uncomfortable situations” in the event that agency inspectors start asking about the bifurcation of business and personal expenses.

Put another way, what the IRS wants to know in certain instances is just exactly how -- and where -- a business owner is slotting income, expenses and deductions.

The term “red flag” often pops up in discussions of IRS audits, with one such flag prominently flapping whenever an agent notes a marked discrepancy between a flamboyant lifestyle and a relative paucity of income.

Other flags are waving, too, in instances such as these:

  • Where an examiner notes what he or she regards as an unusually large dollar amount denoted for business entertainment expenses
  • Where virtually all auto-related costs are claimed as business expenses, even though a vehicle is also used for personal use
  • Where any identified income is seen as not being reported, which will likely spur a deep dive and perhaps even a criminal investigation into personal/business records
  • Any case where a business takes in a lot of cash

Although there is often a legitimate and perfectly reasonable response to all such IRS inquiries, of course, an audited business owner must be able to produce sufficiently accurate and detailed records to support it and satisfy IRS examiners.

For any business owner facing audit-related concerns, the above-cited source discussing the process suggests hiring a professional tax attorney for representation.

As it notes, things might actually proceed far more smoothly with seasoned counsel on board, given that the IRS “in many instances might prefer dealing with a professional familiar with the process.”

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