Avoid These Common Tax Mistakes

As a small business owner, you work hard to keep your company running smoothly. The last thing you need is the IRS knocking on your door with an audit. While most businesses fly under the radar, certain mistakes can significantly increase your chances of being audited.

Todd S. Unger, Esq. LLC works with small and mid-size businesses across New Jersey and the U.S. to resolve tax issues and prevent costly missteps. If you want to stay off the IRS radar, avoid these 10 common tax mistakes that often trigger audits.

1. Failing to Report All Income

Underreporting income is one of the quickest ways to land in IRS trouble. The IRS receives copies of all W-2s and 1099s, so if your reported income doesn’t match what others have reported about you, it raises a red flag.

How to avoid it: Carefully track all sources of income, especially cash, freelance, or side-gig payments. Make sure your books match your tax forms, and reconcile everything before filing. Even small omissions can trigger IRS notices or a full audit.

2. Misclassifying Employees as Independent Contractors

Misclassifying employees as contractors may save money in the short term by avoiding payroll taxes and benefits, but the IRS watches this issue closely. If you exert significant control over how and when someone works, they’re likely an employee under IRS rules.

How to avoid it: Review IRS classification criteria carefully. If your contractor works full-time, uses your tools, or follows a tight schedule under your supervision, it’s time to reevaluate their classification. Incorrect classification can lead to back taxes, penalties, and interest.

3. Mixing Personal and Business Expenses

It might seem harmless to deduct your personal cell phone or meals out as business expenses, but the IRS expects a clear separation between personal and business finances. Improper deductions are a common audit trigger.

How to avoid it: Set up separate business accounts and credit cards. Only claim expenses that are directly related to running your business. Keep receipts, track categories, and never co-mingle funds.

4. Claiming Deductions That Are Too High for Your Income

If your expenses seem disproportionately high compared to your revenue, the IRS may take a closer look. For example, reporting $90,000 in business expenses on $100,000 in revenue may appear suspicious.

How to avoid it: Take only legitimate deductions and make sure they’re well-documented. If your expenses seem unusually high, compare them to industry norms; be prepared to explain why.

5. Poor Recordkeeping in Cash-Based Businesses

Businesses that handle a lot of cash, such as restaurants, salons, and retail shops, are more likely to be audited due to the risk of unreported income. The IRS knows how easily cash can disappear from the books.

How to avoid it: Keep a consistent, accurate log of all cash transactions. Use software to track sales and deposit all cash into your business bank account. Regularly reconcile your daily sales with deposits.

6. Reporting Business Losses Year After Year

Startups and new businesses often run at a loss during their first year or two, but if you’ve been reporting losses for three, four, or five years straight, the IRS may decide your business is actually a hobby.

How to avoid it: Keep thorough records showing your intent to make a profit. Maintain a business plan, track marketing efforts, and document financial decisions. If you’re investing time and resources to grow, your business will likely be viewed as legitimate.

7. Taking the Home Office Deduction Incorrectly

The home office deduction can save you money, but it’s also easy to misuse. You must use the space exclusively and regularly for business, not occasionally from the kitchen table or the guest room.

How to avoid it: Deduct only the square footage used solely for your business. Maintain records of the layout, photos of the space, and utility bills. If your situation allows, you can also use the simplified method of $5 per square foot (up to 300 square feet).

8. Claiming 100% Business Use of a Vehicle

The IRS may become skeptical if you only own one vehicle and claim it’s used exclusively for business. In most cases, some personal use is expected even for entrepreneurs.

How to avoid it: Keep a mileage log showing each business trip’s date, distance, and purpose. Only deduct the portion of driving that’s directly related to work. If you truly use a vehicle only for business, be prepared to back it up with detailed records.

9. Late Payroll Tax Filings and Missed Payments

Failing to file or pay payroll taxes on time is a serious violation if you have employees. The IRS considers payroll taxes “trust fund” taxes, and falling behind puts your business on thin ice.

How to avoid it: File all forms (such as 941s) on time and remit withheld taxes promptly. Consider using a payroll provider to help stay on schedule. The IRS takes payroll tax violations very seriously, and audits are often the result.

10. Math Errors and Rounding

Believe it or not, simple math errors and overly rounded numbers can raise suspicions. It may look like guesswork if your expenses are listed in neat $1,000 chunks or your totals don’t match your schedules.

How to avoid it: Use reliable accounting software or a professional tax preparer to eliminate math mistakes. Enter exact amounts, don’t estimate. Always double-check totals before submitting your return.

Protect Your Business from IRS Trouble

Avoiding these common tax mistakes won’t guarantee you’ll never be audited, but it will significantly lower your chances. Accurate records, clear separation of business and personal expenses, and proper classification of workers go a long way toward keeping the IRS at bay.

And if you get audited or receive a notice from the IRS, don’t panic.

At Todd S. Unger, Esq. LLC, we help small business owners across New Jersey and beyond resolve federal tax issues, respond to audits, and implement proactive compliance strategies. Whether you’re catching up on back taxes or trying to avoid red flags in the future, we’re here to help.

Contact us to schedule a consultation and protect your business from costly tax mistakes.