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What is the IRS looking for during a business tax audit?

Owners of small businesses in Georgia may be interested in some information on what the Internal Revenue Service is trying to find when conducting a business tax audit. Depending on what its analysis shows, there could be serious issues for the business owner.

When a business is audited by the IRS, the agency is generally looking at both the business's finances and the owner's tax situation. Some specific items can be red flags that can require the owner to show justification for various business and personal expenses. One of the most common issues is when a business owner's lifestyle does not seem to fit with the income that is claimed. IRS auditors will look at personal details, such as what type of car the person owns and compare that with the owner's claimed income after their business deductions. If the two don't seem to match, the IRS may find cause to dig deeper.

When these deductions include a lot of claimed business expenses that could potentially be personal, this can also be a red flag. Claiming a significant amount of meals and entertainment expenses as part of the business may require documentation to back those claims up. In addition, vehicle expenses may require receipts and logs to prove that the trips were not personal in nature. If the business takes in a large proportion of its income as cash, this may also be a red flag for IRS agents to take a closer look at receipts.

When an IRS audit seems inevitable, a tax attorney who has experience in audit defense may be able to help. The attorney might be useful in examining the person's expenses and deductions and representing that person throughout the process.

Source: Findlaw, "IRS Audits", January 06, 2015

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