Avoiding Audit Triggers: Tips for Keeping Your Books Clean & Ready

Today, we are talking about what triggers an IRS Business Audit for Restaurant Owners. There are many ways in which the IRS determines who should be audited. They are able to match up your business records with your submitted tax returns to see if the information is accurate.

They also have an automated system that determines which tax returns... Continue reading until the end to find out how to avoid being a walking red flag in the IRS system. 

No business owner goes into business thinking “I can’t wait to be audited be the IRS!”. While no one ever wishes to be audited, we should all do our best to be ready if we are ever audited and/or avoid obvious triggers. For starters, let’s talk about:

Avoiding Audit Triggers: Tips for Keeping Your Books Clean & Ready

The Different Types of IRS Audits

An audit is essentially an investigation by the IRS. There are several ways that an audit is performed by the IRS.

Office Audit – This type of audit is managed at one of the IRS’s local field offices.

Correspondence Audit – This is the lowest level of an IRS audit and usually only focuses on simple errors on a tax return; everything with this type of audit is done via mail.

Field Audit – This is when an IRS agent comes to your place of business, home, or tax professional’s office.

The IRS also performs 7 different types of audits:

• Compliance

• Construction

• Financial

• Information Systems

• Tax

• Investigative

• Operational

This article will look at some red flags that can lead to an audit. Next up, we are going to talk about…

Red Flags that May Result in a Tax Audit

Let’s talk about the top 6 small business tax audit triggers for restaurant, bar, bakery, and catering business owners and how to reduce your chances of triggering one of them.

Audit Trigger #1 – Missing Income

Audit Trigger #2 – Claiming Business Losses Year After Year

Audit Trigger #3 – Underreporting Income from a Cash Business

Audit Trigger #4 – Rounding Numbers and Making Mistakes

Audit Trigger #5 – Reporting Excessive Business Expenses

Audit Trigger #6 – Mixing Business and Personal Expenses

Unfortunately once an audit has started, there’s nothing you, your bookkeeper, or accountant can do to stop it. On top of that, the IRS fees, interest, and penalties add up extremely quickly.

The good news is, the  IRS will work with you if you owe money ( the worst thing you can do is completely ignore them). Always remember this, ignoring the problem will not make it go away. 

Did you know there are IRS tax relief programs set up to help taxpayers pay back the money they owe to the IRS.

You’re more valuable while out of jail paying back the money you owe to the IRS. I recommend hiring a bookkeeper ASAP. Also, it’s not enough to talk to your account 1x per year ( tax time only). It’s also important that you communicate with your accountant throughout the year. 

Running a small business can be challenging, and IRS audits are a real concern. Today we talked about, how to avoid triggers like missing income, excessive business expenses, and more.

I highly recommend hiring a bookkeeping agency that specializes in restaurant bookkeeping. When it comes to IRS audits, the best practice is to stay ready, so you don't have to get ready. Also, make it a habit to always file your taxes correctly. If audited, don't ignore it, it will only grow! instead, seek professional help (keep your accountant/tax preparer in the loop). Book a free 15-minute call with us today!

It's time for a little Audit Triggers Q & A for restaurant owners

What is the best way to avoid an audit?

How to avoid a tax audit

• Be careful about reporting all of your expenses. Make sure it's actually a valid & justifiable business expense.
• Itemize tax deductions.
• Provide appropriate detail.
• File on time.
• Avoid amending returns.
• Double check your math.
• Be exact! Don't round your numbers.
• Don't make excessive deductions.

What is likely to trigger an audit?

Failing to report all your income is one of the easiest ways to increase your odds of getting audited. The IRS receives a copy of the tax forms you receive, including Forms 1099, W-2, K-1, and others and compares those amounts with the amounts you include on your tax return.

What are red flags for getting audited by the IRS?

Some red flags for an audit are rounding your numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts.

What’s the worst that can come from an audit?

Tax evasion and fraud penalties are some of the worst IRS audit penalties that you can face. The civil fraud penalty is 75% of the understated tax.

Do paper returns get audited more?

The IRS maintains that filing returns electronically can prevent mistakes and lower the odds of an audit. The error rate for a paper return is 21%. The error rate for returns filed electronically is 0.5%.

Do you feel ready for the upcoming tax season?

Ready to transform your restaurant's finances? Whether you need Monthly Bookkeeping, a Catch-up Bookkeeping service, or want to embark on our DIY Bookkeeping Course, we've got you covered. Have questions or need more information? Don't hesitate to reach out. Let's talk about how we can support your business. Schedule your FREE 15-Minute Call today and let's get started on your path to stress-free bookkeeping!