Triggers for LLC Business Owners to Prevent Audits
Familiarize yourself with common missteps that trigger IRS audits to safeguard your LLC and business finances. Here's a breakdown of actions LLC owners frequently overlook:
Neglecting Timely Filings
Topping the list of audit triggers is untimely tax filing. Many entrepreneurs let their LLCs slide on filing taxes for years, assuming insufficient revenue or lack of income calls for a pass. However, creating an LLC generates a filing requirement, even in the absence of income. If the IRS deems it necessary, they will file a substitute return on behalf of the taxpayer, using aggregated information. To avoid these situations, guarantee yearly filings.
Skipping Estimated Tax Payments
Another potential audit cause is failing to make estimated tax payments. New entrepreneurs might be unaware of these requirements, including the need to pay quarterly estimated taxes. Neglecting this responsibility can result in a significant year-end tax bill, leading to potential audits.
Hiding Income
Failing to report income is a common red flag. Some LLC owners believe that if income falls below a certain threshold (e.g., $5,000 with $7,000 in expenses) or aren't issued a 1099, the IRS won't be aware of their earnings. However, the entity responsible for issuing 1099s ensures that the IRS receives a copy as well, for their tax deduction purposes.
Overstating Expenses
While legitimate business expenses should be reported, excessive expenses relative to income might attract IRS attention. Report real expenses from checks, bank transfers, and credit card statements to dodge unnecessary scrutiny.
Neglecting 1099 Issue for Team Members
Not issuing 1099s to team members, even those working remotely from countries like India or the Philippines, is another instigator for audits. When people are working as part of your team, they must receive a 1099, and backup withholding must be applied. This requires withholding 30% of foreign contractor payments and remittance to the IRS.
Rounding Expenses
Estimating expenses with rounded figures such as $500, $2,000, or $5,000 is a common mistake. Accounting is rarely perfect, and the IRS recognizes this. Report exact expenses derived from checks, bank transfers, and credit card statements to avoid suspicion.
Bonus: Inefficient LLC Management
Managing multiple LLCs without filing timely tax returns is an overlooked audit trigger. Make sure to file tax returns for each LLC, and dissolve LLCs that are no longer operative to eliminate IRS filing obligations.
Entrepreneurs often stumble into audit situations due to a lack of awareness about the rules. To ensure your LLC's and business's financial security, familiarize yourself with these audit flags to seamlessly steer clear of IRS scrutiny.
Please note that the information provided here is not financial, tax, or investment advice. It is essential to consult with a licensed professional for advice tailored to your unique circumstances.
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- Karla Dennis, despite being advised to issue a 1099 to a remote team member in the Philippines, decided to ignore the requirement, potentially triggering an IRS audit.
- Dennis may also have overlooked the importance of auditing her LLC's 1099s, neglecting to report all sources of income to the IRS, which could potentially lead to an audit.
- In addition to these oversights, Dennis might have failed to accurately report expenses, using rounded figures or overstating them, which could also attract IRS attention and potentially lead to an audit.
