Nobody knows better how to raise flags for an IRS audit than tax accountants. And boy do they have stories to tell. The online accounting software provider Xero surveyed its network of accounting partners to find out about the most ill-advised deductions small business owners have tried to take. They also asked accountants to point to deductions you might be missing out on.
Out-of-pocket expenses and auto expenses, including gas, parking, and tolls, are the number one and two most overlooked small business deductions, according to Xero's online survey of 400 US accountants, conducted last month by Zogby Analytics. Also on the list of deductions business owners are prone to miss out on: depreciation, office improvements, and new hires.
Among the strangest deductions accountants say they've seen small businesses try to take: family vacations, pets and pet food, deadbeat relatives, traffic tickets, spaghettios, a daughter's wedding, alcohol, clothes for the dog, and gambling losses.
Among the common mistakes that accountants say trigger IRS audits are: excessive deductions, misidentifying workers (i.e. as contractors instead of employees or vice versa), home office deductions, and mixing business and personal expenses in deductions.
And then there are the mistakes that generally keep small businesses from running smoothly. Those, according to more than half of accountants surveyed, include not keeping financial records up to date. Not budgeting and forecasting annually, not meeting regularly with an accountant, misclassifying employees, and not incorporating the business are the other big mistakes accounts name.
Most accountants surveyed agree that, to keep your business in good financial standing, you should confer with your accountant monthly. And the best time to prepare for tax day? All year long, 63 percent of accountants say.