How To Increase Your Chances of an IRS Audit

By: Ruth King

One of my clients was mixing personal expenses and business expenses:

• They paid their son’s private school tuition out of the business operating checking account.
• They took their personal vacation expenses out of the business checking account.

This caused a lower bottom line, increased overhead cost, and unrealistic pricing.  We got the personal expenses out of the business. Revenue AND the bottom line increased.

Another client paid his nanny out of the business checking account. She was on the payroll with absolutely nothing to do with the business.  I made him increase his salary to cover the cost of his nanny.  She was no longer on the payroll.

And still a third “borrows money” from the business and shows it as an accounts receivable – with no paperwork to back it up and no intention to every pay it back. Some of the loans have been there for more than 5 years – with no payment or interest paid.  This is now in the hands of the company CPA who will advise.

And the worst example, in my opinion, is that the owner paid all of their personal utility bills and expenses on the company credit card.  Employees knew they were doing this and said, “if the owners can do it, then so can we.”  There were tens of thousands of dollars of personal drinks, personal gas, and much more on the company credit card each month.  The owners cleaned up their act and forced their employees to do so as well.

These are just a few examples of increasing your chances of getting an IRS audit.

And no, I’m not a CPA or a tax advisor.  I’ve just seen my clients go through the audit stress KNOWING that they are co-mingling business and personal expenses. I’ve seen them get less value for their businesses because the bottom line was less because of personal expenses.

If you ever want to sell your business – get serious about clean financial statements. Only have business expenses in your business. Personal expenses need to be separate and NOT paid through the business.

No potential buyer is going to sift through your P&L when you say that Expense X is personal, etc.  They’ll just go onto another company to potentially purchase.

Buyers want to see clean financial statements showing increasing profitability.

If you need to increase your salary to cover your personal expenses, then do it. You’ll have cleaner books and a better opportunity to show a real profit.

Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here. 

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