No business owner wants to receive that dreaded letter from the IRS stating their bookkeeping records are under audit. While an audit doesn’t necessarily mean you’ve done something wrong, certain bookkeeping habits can raise red flags. Whether you’re managing your own bookkeeping or working with a professional bookkeeper, it’s crucial to avoid these common pitfalls.
At Entikis Bookkeeping, we specialize in helping businesses in Fort Worth, Texas, and the greater Dallas-Fort Worth area maintain accurate financial records and ensure smooth tax preparation. Let’s take a look at some bookkeeping habits that could increase your chances of an IRS audit and how you can prevent them.
1. Excessive or Unusual Deductions
One of the most common red flags for the IRS is claiming excessive deductions that don’t align with your industry or income level. While tax deductions are a great way to reduce your taxable income, they must be reasonable and well-documented. Large charitable contributions, home office deductions, or business expenses that seem out of proportion with your revenue may raise suspicion. A skilled bookkeeper can help you ensure your deductions are valid and properly recorded.
2. Consistently Reporting Losses
If your business reports a loss year after year, the IRS may question whether it is truly a business or just a hobby. The IRS expects businesses to generate a profit at some point. While occasional losses are understandable, repeated losses without a clear business plan or growth trajectory could increase your audit risk. Working with a professional bookkeeping service in Fort Worth, Texas, ensures you have a solid financial strategy in place to show the IRS that your business is legitimate.
3. Mismatched Income Reporting
The IRS cross-checks your reported income with the information submitted by clients, customers, or payment processors (such as 1099s and W-2s). If the numbers don’t match, this will likely trigger an audit. A professional bookkeeper can help you reconcile accounts and ensure accurate reporting, reducing the risk of IRS scrutiny.
4. High Cash Transactions
Businesses that primarily operate in cash—such as restaurants, bars, and some service-based industries—are more likely to be audited. Large cash deposits or withdrawals without proper documentation can raise suspicions. Maintaining detailed records of all transactions and using bookkeeping software to track income and expenses can help substantiate your financial reports.
5. Mixing Business and Personal Expenses
One of the biggest mistakes small business owners make is blending personal and business finances. Using your business account for personal expenses (or vice versa) can make it difficult to prove which expenses are truly business-related. Opening a separate business bank account and keeping meticulous records can help you avoid this common pitfall.
6. Incorrectly Classifying Workers
Misclassifying employees as independent contractors to avoid payroll taxes is a major red flag. The IRS has strict guidelines for determining whether a worker should be classified as an employee or a contractor. If you’re unsure, consulting with a bookkeeping professional in Dallas-Fort Worth can help ensure proper classification and compliance with tax laws.
7. Large Round Numbers on Tax Returns
If your tax returns are filled with round numbers (e.g., $5,000, $10,000), the IRS may question their accuracy. In reality, business expenses rarely come in perfectly rounded amounts. Keeping precise records and tracking actual expenses to the penny can help you avoid unnecessary IRS attention.
8. Not Filing or Filing Late
Filing taxes late or failing to file altogether is a guaranteed way to land on the IRS radar. Even if you can’t afford to pay your tax bill in full, filing on time can help you avoid penalties and reduce audit risks. Professional bookkeeping services can help keep you on track with tax deadlines and ensure timely, accurate filings.
Visit the IRS tax filing page for deadlines and extensions.
9. Home Office Deduction Errors
The home office deduction is a valuable tax benefit for many small business owners, but it must be claimed correctly. To qualify, your home office must be used exclusively for business purposes. Claiming a home office deduction for a space that serves other purposes—like a guest room—could raise red flags. A knowledgeable bookkeeper can guide you on how to properly claim this deduction.
10. Failing to Keep Proper Documentation
The IRS requires businesses to maintain proper records, including receipts, invoices, bank statements, and payroll documents. If you’re ever audited, having detailed documentation is your best defense. Bookkeeping professionals in Fort Worth, Texas, can help ensure all your records are in order so you’re always prepared.
Protect Your Business with Professional Bookkeeping
Avoiding an IRS audit starts with sound bookkeeping practices. Whether you’re a small business owner in Burleson, Fort Worth, or anywhere in the Tarrant County metroplex, working with a professional bookkeeper can help you maintain accurate records, reduce audit risks, and stay compliant with tax laws.
If you are looking for professional bookkeeping services, please contact us at Admin@Entikis.Com or 817-415-1715 to learn more about how Entikis Bookkeeping can support your journey to success! Located at 640 Taylor St Suite, Fort Worth, TX, United States, we offer professional bookkeeping services for businesses in Burleson, Fort Worth, and the surrounding Tarrant County metroplex.
For more details, please visit our website: Entikis Bookkeeping
