Many business owners are understandably worried about facing an IRS audit. Even business owners who believe that they have been 100% compliant with their federal and California state tax obligations may still fear that an error or mistake could lead to new tax liabilities. Therefore, some business owners ask whether it might be wise to avoid claiming certain tax deductions or credits in order to decrease their likelihood of facing an audit. While the logic here is understandable, most business owners would have difficulty unnecessarily inflating their taxes for a theoretical reduction in odds you would face an audit. Therefore, business owners should claim the tax credits and deductions they are entitled to claim. However, they should ensure that they have evidence that can support their tax position prior to making a claim.
Certain claims or approaches to taxes can set off alarms at the IRS. For instance, many business owners understand that they can write-off business losses. By deducting business losses, these taxpayers can reduce or eliminate their tax burden. However, businesses that lose money year-after-year and do not seem to be run as a for-profit endeavor may lead to the IRS disallowing these deductions. The IRS may determine that your online business is actually a hobby or an illegal tax shelter and open the door to the potential for significant penalties.
Furthermore, the IRS may be interested in claims your business made regarding start-up expenses, depreciation of goods, and you advertising and marketing agreements. If your business made claims for deductions that are out of step with businesses having similar characteristics to your own, that could also trigger an audit.