What are the chances I'll get audited by IRS?

Question

I own a very small restaurant, about 300 sqrfeet, It was opened in 2004.

I filed in 2004, but I still owe returns for 2005-2007. I will file these returns by October 15.

The business has not been profitable, barely earning a profit. I've had to use my credit card to pay various expenses. I believe the business has potential so I plan to stay open.

The problem is that I didn't organize my expenses and revenues very well and I didn't keep great book keeping. On these returns, I've had to do a lot of estimation, but the numbers are generally accurate

The numbers on the returns are not out of line, the deductions are reasonable and the COGS are 45% of total gross income.

Will I be an audit target because of these late returns? If I do get audited, what's the best way to avoid being hit with a big fine?

Thank You

Answer 1

Well, not filing for 3 filing seasons, then filing 3 years of losses will definately send up red flags. I would follow the previous advice about getting a tax accountant to help you out. The more you can have in records the better. If you do get audited, the IRS isn't going to let you deduct anything you don't have records for no matter how reputable your tax accountant is.  

On another note - just because you mentioned it - have you addressed anything in regards to how you market your company? After 4 years, if you're not earning a profit (or much of one) the way things have been going, you aren't going to. You may want to reevaluate your approach. All the potential in the world won't help without the best marketing approach. Location, hours, demographics, etc.

And get an accountant! With lack of records, you may be doing better than you think. Or worse. How much of your expenses are necessary, and how much aren't. An accountant will keep up with and tell you these things. If you haven't been keeping the best books, you are someone who needs an accountant. It's all about expertise: You don't tell them how to crunch the numbers and they won't tell you how to bake that pie! :-D

Answer 2

The IRS is looking for returns from people who have not filed returns in the past years. They do have your soc. sec. number and any third party documents.

You did not mention if you were incorporated or not. Also, you contradicted yourself first by stating your bus. has not been profitable then coming back and stating it's operating at a profit!

The IRS has increased their audits on small businesses particularly proprietors (i.e. Schedule C filers).

You will need records to document your income and expenses.

It doesn't matter what you believe in but what you can document on the return! Use the records from your bank statements as well as the credit card statement!

You should seek the assistance of a local tax practitioner instead of asking for assistance here!

Answer 3

You run a lower risk of being audited if your late returns are prepared and submitted by a tax accountant - they are considered to be inherently more trust-worthy.

Answer 4

If your COGS is 45% of gross you are definitely audit bait.  Audited returns that I have seen lately didn't pass the smell test when you looked at them.  33% would be about right for most restaurants so you look way out of line.