The small business audit rate decreased in 2013, according to new documentation released by the Internal Revenue Service (IRS). The decline — “from 0.71% in 2012 to 0.61% in 2013,” according to Small Business Trends — is not necessarily cause for celebration.
When compared with small business audit rates over time, the current percentage is alarmingly high — or 0.61% compared to 0.36% in 2004. The small decrease over the past year, moreover, is unlikely to repeat itself. “Given the tax agency’s belief that small business owners are responsible for a sizeable portion of the tax gap –- the difference between taxes owed and taxes paid -– the IRS seems unlikely to cut the small business audit rate considerably this year,” Small Business Trends explains.
USA Today confirms the IRS is, if anything, even more likely to audit small businesses than individuals or large corporations. “If your business runs mostly on cash or cash incentives — you’re a taxi driver, car washer, work in a hair salon or bar — you’re more likely to get audited. Workers in these professions tend to not accurately report all of their taxable income, like the amount of tips earned,” USA Today warns. “If you are the owner a small business, be sure to report all the income you’ve received to avoid getting audited.” Pharmacists, on the other hand, are lauded as the second most honest career path in the U.S. Running a business with thorough counts of inventory and sales, such as a pharmacy, will garner trust with the IRS.
Small businesses also risk getting audited if they do not choose investors or partners wisely. “Transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit” significantly increase chances of an evaluation or closer look by the IRS, according to USA Today.
Fox News upholds the conventional wisdom, stating, “Small-business tax rule No. 1: Don’t mess with the IRS.” Fox adds, however, that with some discretion and research small business owners are entitled to certain deductions, including deductions for home offices, furniture, equipment, and work-related mileage.