Common Tax Mistakes LLC Owners Make That Can Trigger an IRS Audit

Audit Triggers For LLC Business Owners To Avoid
For LLC business owners, understanding what not to do is just as important as knowing what to do—especially when it comes to avoiding an IRS audit. According to Karla Dennis, EA, MST, and CEO of KDA Inc., there are several frequent missteps she sees entrepreneurs make that can raise red flags with the IRS. Here’s a breakdown of the most common audit triggers and how to avoid them.
  1. Not Filing Taxes on Time
    One of the biggest audit triggers is simply not filing a tax return. Many business owners mistakenly believe that no income means no filing requirement, but forming an LLC automatically creates one—regardless of earnings. Failing to file can result in the IRS issuing a “substitute for return” and beginning enforcement actions.
  2. Ignoring Estimated Tax Payments
    LLC owners are typically required to make quarterly estimated tax payments. Failing to do so may result in a large year-end bill and increase the chances of an audit. The IRS often sees missed payments as a sign that the taxpayer may not understand how to report income and expenses correctly.
  3. Not Reporting All Income
    Many owners assume that if they didn’t receive a 1099 form, their income isn’t on the IRS’s radar. However, entities that issue 1099s also report them to the IRS. Failing to report all income—no matter how small—can lead to serious consequences, including CP2000 notices and potential audits.
  4. Overreporting Expenses
    While legitimate business expenses are deductible under IRS rules, reporting excessive expenses—especially when paired with little to no income—can trigger an audit. If your financials are atypical, including a brief statement in your return may help preempt IRS concerns.
  5. Not Issuing 1099s to Contractors
    LLC owners are required to issue 1099s to all qualifying contractors, including remote workers abroad. If working with foreign contractors, backup withholding (typically 30%) may be required. Failing to comply with this obligation can lead to audit flags.
  6. Using Rounded Numbers
    Rounded estimates like “$500” or “$2,000” are a red flag. Real business expenses rarely total such clean figures. Always use actual amounts from records like bank or credit card statements to avoid drawing unnecessary scrutiny.
  7. Failing to File for Each LLC
    Every LLC must file a tax return—even inactive ones. If you’ve created multiple entities, be sure to file returns for each or formally dissolve any that are no longer in use to prevent ongoing tax obligations.

Many LLC owners inadvertently invite IRS attention due to a lack of awareness about their tax obligations. Staying compliant by filing on time, reporting all income, avoiding exaggerated deductions, and maintaining accurate records can go a long way in keeping your business off the audit radar. Always consult a tax professional for guidance tailored to your specific situation.

Click here to view original web page at forbes.com by Karla Dennis, EA, MST, CFO/CEO of the award-winning tax accounting firm KDA Inc.—specializing in tax planning.