According to the latest data, on average 642,603 businesses get audited each year. In FY 2022, IRS audited 626,204 tax returns which is 5.24% down from FY 2021.
The IRS audits about 0.40% of taxpayers each year. However, Small businesses face an audit rate of about 2.5%. The percentage of businesses that get audited tends to increase along with income and asset size, particularly for sole proprietorships and C-corporations.
It’s worth noting that most audits are completely random, as the IRS selects a certain number of tax returns each year as a compliance check.
However, there are certain triggers that can increase a business’s chances of being audited, such as claiming deductions that seem too high for their income level or reporting a high amount of income.
What Are The Common Reasons Why Businesses Get Audited
There are several common reasons why businesses get audited.
These include high income reported on a Schedule C, S-Corp shareholder-employees earning low or no salaries, pandemic-related stimulus payments, mistakes, excessive expenses, home office deductions, losses on your Schedule C, missing income, real estate loss and high deductions.
Other reasons for an audit may include making math errors, failing to report some income and claiming too many charitable donations.
What Are The Most Common Mistakes That Trigger An Audit
Some of the most common mistakes that trigger an audit include reporting the wrong taxable income, huge donations with a small income, pricey dinners with clients, personal use of a business vehicle, running a cash-based business, not reporting all your income, claiming too many charitable donations, digital asset transactions and Covid-19-related withdrawals from retirement accounts according to multiple source such as HR Block, Bench, and Bloombergtax.
What Are The Consequences Of An Irs Audit For Businesses
An IRS audit is a review of a business’s financial records and tax returns to ensure that they are accurate and comply with tax laws. According to Sambrotman, MDtaxattorney, and Polston Tax, a business that fails an audit may face several consequences.
The IRS may find that the business did not pay the correct amount of taxes, resulting in a bigger tax bill. In addition to penalties, the business is required to pay the additional taxes as well as interest on those taxes.
There are different types of penalties that a business may face if it fails an audit.
Accuracy-related penalties are assessed when a business understates its income by $5,000 or 10% of its actual income, whichever is larger. The penalty is 20% of the amount underpaid.
Failure-to-file and/or pay taxes penalties are assessed when a business does not file or pay its taxes on time. Civil fraud penalties are assessed when there is evidence of fraud or intentional wrongdoing according to the MD Tax Attorney.