Every small business owner wants to know why the Internal Revenue Service (IRS) audits some small businesses but leaves others alone. Is there something that a business owner does to trigger a tax audit? Sometimes, it happens by chance, but often, specific financial practices result in a small business being audited.

An accountant in Culver City shares six reasons why small businesses are targeted by the IRS and what you can do to reduce your chances of getting audited.

When you file your taxes for the year, examine the Schedule C form. It shows your reported income. If you misreport your income, it increases your chances of being audited. Here are a few things you should avoid doing.

•  Reporting a higher-than-average income
•  Rounding up income
•  Averaging your income
•  Not reporting all of your earnings

It is quite common among small business owners to itemize deductions on their tax reports. Some of the usual tax deductions business owners may claim include home office deductions, internet bills, travel costs, and vehicle use. These tax deductions may alter a business owner’s tax liability. However, an accountant in Culver City reminds you to be mindful because too many deductions will raise red flags and trigger an IRS audit. The IRS says a legitimate business expense must be ordinary and necessary to qualify as a deduction.

•  An ordinary expense is common and accepted in your specific line of business or trade.
•  A necessary expense is helpful and perfect for your business or trade.

Spending too much or changing expenses drastically from one year to another may force the IRS to audit you. While you may have a valid business credit card, transactions should not be excessive. For example, paying for all meals during the workday using that credit card and claiming them as business expenses can raise red flags.

Cash businesses are a certain type of business that reels in primarily cash for profit and revenue. Some examples of cash businesses are restaurants, barbershops, and beauty salons. As establishments like these rely mostly on cash, they may face an audit if the IRS believes they underreport their income. If your small business has a large amount of cash transactions, it is a good idea to be able to verify your income and document every transaction regularly.

The IRS will not turn its gaze away from you if you claim a business loss every time you file your tax return. Losses are not uncommon for small businesses, but having multiple years of losses may incite the IRS to question the legitimacy of your business. If you get audited after claiming losses, you must show the required documentation to prove your case.

Did you know that even an employee misclassification can trigger an IRS audit? Business owners can misclassify employees as independent contractors for various reasons, including

• Lowering business insurance costs
• Not having to pay specific small business taxes
• Reducing labor charges

According to the IRS, an independent contractor is someone who controls what work will be done and how. The business that hires an independent contractor, or the payer, has a say only in the result of the work.