Unveiling 7 Fraud Audit Reasons for Construction Contractors

Are you a contractor concerned about a potential audit for your business?

Companies in the construction sector can often find themselves vulnerable to various kinds of financial mistakes and purposeful fraudulent actions.

Here at Asnani CPA, we serve general contractors, landscaping contractors, digital agencies, and startups.

By exploring these audit triggers, our aim is to highlight the potential downfalls your contracting business should steer clear of.

The IRS and state tax authorities typically look out for the following red flags during an audit:

7 Fraud Audit Reasons for Construction Contractors

Audit Reason #1 - Underreporting Income

One type of tax fraud in the industry is underreporting income.

Which could include neglecting to record revenue from construction projects or inaccurately documenting cash transactions to evade taxes.

In order to ensure you are paying your taxes on everything, you should be on top of your bookkeeping.

If you have the opportunity to do your own in-house bookkeeping that is great, if not, do not worry.

We do business bookkeeping services for small businesses.

Audit Reason #2 - Falsifying Records

This can be anything from altering your current records, intentionally removing specific details, or completely making fake records.

Intentionally manipulating records is illegal because it can deceive the company's shareholders, regulators, auditors, and even the business owners themselves.

Unless the owners are the ones committing the act.

Audit Reason #3 - Payroll Fraud

Payroll fraud deals with any dishonest or unlawful actions about a company's payroll system.

This typically happens when employees are being classified as 1099 workers, not reporting their workers wages right on their taxes, paying them under the table, etc.

To avoid possible payroll fraud, it's a good idea to restrict the number of individuals who can access the company's financial information.

Conducting regular internal audits of payroll records and transactions can also help detect any suspicious activities in a before it becomes a problem.

Audit Reason #4 - Shell Companies

Shell companies are distinct business entities established to conceal questionable activities that should not be linked to the actual business.

Like money laundering or tax evasion.

Generally, these companies have no significant operations, assets, or employees and exist merely on paper.

Make sure if a company approaches your small business looking to join together, do a thorough investigation of what they do.

Audit Reason #5 - Bribes & Kickbacks

Bribes and kickbacks can and do happen in the construction industry.

Construction companies might engage in them to obtain contracts, permits, or preferential treatment from subcontractors, suppliers, or government officials.

You may witness other businesses in the contracting industry engaging in these practices, but it's crucial not to lower your standards to match theirs.

Instead, report the bribes and kickbacks to the appropriate authorities.

Audit Reason #6 - Skimming

Skimming is a type of embezzlement where employees, or anyone attempting to make some extra money, discreetly take small amounts from each payment, usually at the cashier's counter.

If this goes unnoticed for a while, it can be damaging to your business, and get you in trouble.

It's a good idea to have a third party, such as a bookkeeper, review your records.

Audit Reason #7 - Overstating Expenses

Certain construction firms might be tempted to inflate their costs, for instance, over-emphasizing the expense of materials or labor.

They do this with the intention of reducing their taxable income and resulting in shrinking their tax owed.

It is crucial to resist this practice in order to maintain precise financial records and abide by legal requirements.

If you're struggling with managing your finances, don't hesitate to seek help from a CPA or another accounting professional.

Conclusion

The contracting industry is rife with potential pitfalls and traps that could lead to auditing issues if not publicly addressed.

From underreporting income and falsifying records, to engaging in payroll fraud, creating shell companies, participating in bribes and kickbacks, skimming from cash flows, and overstating expenses—these fraudulent activities not only tear down your business reputation but can also bring serious legal consequences.

Asnani CPA is committed to helping you navigate these challenges and avoid falling into these traps.

With our tailored services for general contractors, landscaping contractors, digital agencies, and startups, we aim to provide you with the accounting support you need to maintain clean financial records and stay compliant with tax laws.

If you are unhappy with your current CPA, schedule a consultation and we will determine if Asnani CPA is the right fit for your business.