As a business broker in Tampa, Florida one of the things I routinely see is small business owners who play games with their Finanical reporting and taxes. Many, many times I have discussed the impact of bad financials on the sale of a business but the reality is that a larger, more ominous issue lies in wait for business owners…namely the IRS.
Now, I am not the brightest financial guy in the kitchen but here are some real issues small business owners need to be aware of and the potential impact as it relates to the Internal Revenue Service (IRS).
There are several potential IRS audit triggers for small businesses, including:
- Underreporting Income: If the IRS detects a discrepancy between the income reported on a business tax return and the income reported on related documents, such as 1099s or W-2s, this could trigger an audit. Think about it…your accountants file your returns electronically. If you are naive enough to think that the the IRS does not have a data base of normal revenue to rent to cost of goods ratios in their data base that reconcile back to your return…well then I have a nice piece of water front property for sale at Three Mile Island.
- Claiming Excessive Deductions: If a business claims deductions that are not commensurate with its reported income or industry norms, this could trigger an audit. Same as #1 above. Think about it, in my simple business brokerage practice in Tampa Florida I do valuations and when reviewing businesses know what cost of goods ratios (COG) should be verse what I see. The IRS has the same data. When they see cost of goods at say 40% in a pizza parlor and the business year over year makes money and survives….are you naive enough to think they are not aware of how #1 and #4 are being played in your Finanical reporting?
- Consistently Reporting Losses: If a business consistently reports losses on its tax returns year after year, this could trigger an audit. See #2 above…..you have a multi million dollar house on the water yet your business shows a loss. True story of a childhood friend I knew and their business….never made money but had nice houses.
- Cash Transactions: If a business deals primarily in cash transactions, it may be more susceptible to an audit, as these transactions are more difficult to track and verify. What small business owners think about when they fail to report cash is a mystery to me. They say they simply don’t want to pay taxes on it (which is a felony). There are better ways of mitigating taxes in a legal fashion. Use of SEP’s, 401k, techniques to recording and expensing inventory are all ways to mitigate the pain of taxes and not risking the felony charges and fines.
- Failing to File or Pay Taxes: If a business fails to file or pay taxes on time, this could trigger an audit. Liens get filed, property seized….you will get caught…you’re not smarter than the IRS
- Large Deductions for Business Vehicles: If a business claims a large deduction for the cost of a business vehicle, the IRS may take a closer look to ensure that the deduction is legitimate.
- Unusual or High Expenses: If a business reports unusually high expenses or expenses that are not typical for its industry, this could trigger an audit.
It’s important to note that these triggers do not automatically result in an audit, but they may increase the likelihood that a business will be audited. To minimize the risk of an audit, small business owners should maintain accurate records and ensure that their tax returns are complete and accurate.
Tampa Bay Business Broker Michael Shea is the #1 Business Broker in Florida. He may be contacted at 321-287-0349 or email him at mike@tworld.com