Every year around this time, business leaders across the U.S. are sweating thanks to Tax Day. Even if you have a professional who handles your finances and taxes, an audit is always possible. We even detailed some common mistakes that can trigger an audit in this February blog post.
While the chances of an audit are pretty rare, unless there is obvious negligence, we want to be a resource for our clients so they never feel that they’re a step behind.
Read on to learn what a business tax audit means and what to expect.
What an IRS Business Tax Audit Entails
An IRS business tax audit is when the IRS takes a closer look to see whether your business included all income and only took deductions and credits allowed by law.
Although many people feel that audits are random, they typically aren’t. In fact, the IRS selects returns that are most likely to have errors, based on complicated criteria. From the time you file a return, the IRS has up to three years to start and finish an audit; most begin with a year after filing and typically end in less than a year. The IRS can also collect back taxes owed for up to 10 years.
However, the process is still long and could mean many complications for your company meanwhile.
The IRS has three ways to handle an audit:
- By mail
- At an IRS office
- In person at your home or business
The field audit, when the IRS comes to you, is the most common. The field audit means an IRS agent will look extensively into the business records, accounting system, and then conduct tests to determine the accuracy of income.
While the average field audit can take a year to finish, with the right preparation and prompt response, you can cut this time down significantly.
How to Prepare for an Audit
Before we get into the tips, it’s important to note that upon notification of an audit (typically a letter) we recommend speaking with your tax preparer before responding.
We can help with that!
Even if the IRS is requesting a single document, you’ll want an expert’s opinion before engaging, as it can snowball into a more serious issue.
Apart from consulting your financial advisor, here are some other steps to follow to make your audit run as smoothly and painlessly as possible.
1. Organize Your Records
First things first, get your records in order.
Poor records can warrant penalties from the IRS; Organize records by year and type (income, expenses, etc.), request bank or credit card info from vendors, make an effort (and document said efforts) to reconstruct lost or destroyed records.
It should go without saying—never make up records!
Some common requests include:
- Cancelled checks
- Loan agreements
- Employment documents
2. Isolate the Yearly Data
Your audit will reflect a specific time period, so only focus on the tax year or years under examination. Accounting data, which is helpful for business analysis and management, is not necessary for the audit.
Make copies of all bookkeeping information and only provide the auditor with the year requested.
3. Be Timely
It’s crucial that you respond to IRS requests for information and documentation on time. In the case that the IRS disagrees with something like a deduction, be your own advocate! Provide proof and explanation as to why you believe it was a fair deduction.
What Are the Potential Outcomes of A Business Audit?
Hope for the best and prepare for the worst, unfortunately this saying is relevant when it comes to audit penalties. Upon closing investigation, if the IRS finds you did not pay enough in taxes, there are various penalties ranging in degrees of seriousness.
Most likely a simple mistake on your tax return could mean a 20-40% penalty, which is why it’s always recommended to have a professional handle your taxes. In cases of fraud or serious errors, a 75% penalty may apply.
Unfortunately if you find yourself in a sticky situation with the IRS and you’re unable to pay your tax debt, the IRS can seize assets.
Saddock Advisory Is Here to Help
Don’t let these concerns keep you up night, the team at Saddock Advisory can help you understand the audit process and then do all the heavy lifting. We’ll take on the stress of an audit and help you understand how to avoid them now and in the future.