People like to speculate about IRS “red flags.” These are the things that are certain to cost you an IRS audit, or else definitely put you in their sights.
And, considering that the IRS increased the number of audits on personal returns by 65% last year, you probably want to pay attention to this next part. If you have a business there is one GIANT red flag you might have that you’ll want to get rid of.
This all has to do with stats on audits. If you have a Sole Proprietorship (Schedule C) business, the chances are 1 in 7 that you will get an audit. Stop a second and think about that – 1 in 7! That’s based on the increased audit force continuing at the current level. Now consider they raised a lot of money last year. I think the IRS is going to get more manpower and that means that they’ll have more people looking for you.
So, if you have a business, what can you do to reduce the audit risk? Form a business structure! We recommend an S Corporation or C Corporation or an LLC that elects to be taxed as an S Corp or C Corp. You’ll have a 1 in 50 chance of being audited that way.
One warning here: If you form a single member LLC and do NOT elect to be taxed as an S Corp or a C Corp, you’re going to the default taxation set-up. And, that means you’re taxed as a Sole Proprietorship. My suggestion is to either elect to be taxed as an S or a C, or add in another partner (perhaps a spouse). With two owners, you’ll become a partnership and file a partnership return with much less audit risk.