by Mark Minassian

While there is no single formula or rule that the IRS uses to select business tax returns for audit, there are red flags that the IRS will look for when deciding whether or not to audit a return.

1. Corporate officers’ salaries. Depending on the type of entity you are operating, the IRS will be on the lookout for salaries that are too high or low, as well as no salaries being reported at all.

2. Deducting personal expenses on your business tax returns. The IRS will look closely at business expenses on a tax return that may include personal expenses such as auto expenses, cell phones, travel, meals and entertainment.

3. Not filing payroll tax returns and not making payroll tax deposits. Not paying your payroll taxes will get the attention of the IRS and open your business to further scrutiny.

4. Misclassifying your employees as independent contractors. This is a very common mistake businesses make. Worker classification audits are very common and can be very costly to a business.

5. Operating a business in a high risk industry. The IRS has long targeted certain types of businesses for audits. These include cash-based businesses such as restaurants, bars and contractors.

6. Operating as a sole proprietor. Sole proprietors are easy audit targets because many do not keep adequate records of their income and expenses.

7. Not paying sales or meals taxes. Your state Department of Revenue may audit your business if you fail to pay (or underpay) these taxes.

8. Not collecting payroll taxes on tips paid to your employees. Restaurant owners must collect payroll taxes on tips reported by their employees, but many do not. This has become such a big issue with the IRS that they are actually working with restaurant owners to educate them on proper tip reporting requirements.