Worried about your contracting business potential audit?
Construction companies and contractor businesses can be susceptible to various forms of fraud and illegal financial activities.
I have witnessed firsthand the implications of fraudulent activities that plague this sector, as well as the industries I specialize in.
By talking about these fraud audit reasons, we hope to shed light on what you should not do for your contracting business.
This can apply to a variety of industries like construction companies, HVAC companies, landscapers, concrete contractors, home builders, and overall general contractors.
The IRS and state tax authorities may look for the following indicators during an audit:
8 Ways Contractors Get Audited For Fraud
Financial Fraud Audit Reason #1 - Payroll fraud
Payroll fraud refers to any deceptive or illegal activity related to a company's payroll system.
This type of fraud can include paying employees "under the table" to avoid payroll taxes, misclassifying workers as independent contractors, or not reporting employee wages accurately.
To avoid any potential payroll fraud, you will want to make sure to keep access to company financial information to a minimum.
Ensure your accountant also keeps their systems private.
Also perform regular audits within your company of payroll records and transactions to stay on top of any suspicious transactions.
Financial Fraud Audit Reason #2 - Shell companies
What are shell companies?
They are separate business entities created to hide shady activities that you don't want to be associated with your actual business.
Shell companies typically are used to evade taxes, launder money.
These companies typically have no substantial operations, assets, or employees and exist only on paper.
Financial Fraud Audit Reason #3 - Underreporting income
A common form of tax fraud involves underreporting income, such as omitting or understating revenue from construction projects or misreporting cash transactions to avoid paying taxes.
This can be done by mistake by not recording cash transactions, or having complex accounting schemes.
It can be counteracted by staying diligent with your bookkeeping, keep business finances and personal finances separate, use technology to streamline your accounting, and maintain ethical business practices.
At CBW Accounting & Tax, we utilize the outsourced accounting model to do your business tax returns, bookkeeping, tax reduction planning, and payroll.
Schedule a consultation if you are in need of an accountant.
Financial Fraud Audit Reason #4 - Overstating expenses
Some construction businesses could potentially exaggerate their expenses, such as overstating material or labor costs, with the aim of lowering their taxable income and reducing their tax liability.
It's important to avoid this in order to maintain accurate financial records and to comply with the law.
You do not want to get your business in trouble with the IRS.
If you do your own accounting, make sure you stay up to date with the current tax laws, and make sure your records are kept up to date.
You can also talk to a CPA or another accountant if you are having trouble keeping records of all your finances.
Financial Fraud Audit Reason #5 - Falsifying records
This can involve creating completely false records, modifying existing ones, or deliberately leaving out important information.
Falsifying records can also apply to three of the 8 ways contractors get audited, overstating expenses, underreporting income, & payroll fraud.
It is illegal to falsify records on purpose, as it can deceive the shareholders of the company, regulators, auditors, and the business owners themselves if they are not the ones doing it themselves.
Financial Fraud Audit Reason #6 - Skimming
Skimming is a form of embezzlement where employees, or someone just trying to get some money, does it by taking off a little bit of money from each payment, typically done at the cashiers counter.
This can go unnoticed for a long time if you aren't on top of your finances.
It is a best practice to have a third party look at your records like a bookkeeper.
There is new technology out there that can monitor each transaction and detect if any money is going anywhere other than to the register.
Financial Fraud Audit Reason #7 - Kickbacks and bribes
Construction businesses may be involved in illegal kickbacks or bribes in exchange for securing contracts, permits, or favorable treatment from subcontractors, suppliers, or government officials.
Kickbacks and bribes are both illegal and unethical by undermining the competition.
Both of these are similar, kickbacks are usually money being sent to another individual or entity in return for business favors or influence.
Bribes don't need to be money, but they are also given to individuals in power.
You may see other businesses in the contracting industry do these two things, and while it is not fair to anyone, do not stoop down as low as those businesses have.
Contact the appropriate authorities to report the bribes and kickbacks.
Financial Fraud Audit Reason #8 - Bid rigging
Bid rigging occurs when construction companies conspire to manipulate the bidding process to ensure a specific company wins the contract, often at an inflated price.
Report any suspicious activity to the Department of Justice's Antitrust Division.
Keep in mind that bid rigging is not only morally wrong but also against the law, with serious consequences like fines and jail time.
It's crucial for every company to take measures to avoid it.
Conclusion
I have seen how fraud can infiltrate these industries, leading to severe actions.
The IRS does not take fraud lightly, and they audit businesses on these 8 key areas mentioned in the blog.
All of these activities are unethical and illegal and can have severe penalties.
CBW Accounting & Tax provides expert outsourced accounting services, including tax returns, bookkeeping, tax-saving strategies, and payroll management.
If you are unsatisfied with your current accountant, feel free to contact us and schedule a consultation to see if we are the right accountant for your construction business.
