What Happens If I Get Audited? How to Prepare Your Business
- Karina Berette
- Oct 7, 2024
- 5 min read
The word audit is enough to strike fear into the heart of any business owner. While getting audited by the IRS may seem daunting, it's important to remember that audits are not always about finding mistakes. They’re often a routine check to ensure that your financial records and tax filings are accurate.
However, if you do get that IRS audit letter, it’s crucial to be prepared. Knowing what happens during an audit and how to prepare your business can save you stress and potential penalties. This guide will walk you through what to expect if your business gets audited and how to prepare effectively.
1. Why Do Businesses Get Audited?
The IRS audits businesses for various reasons. While some audits are random, others may be triggered by specific red flags in your tax return.
Common Audit Triggers:
Unusually high deductions compared to your income.
Large cash transactions that are inconsistent with your industry.
Home office deductions that seem excessive.
Discrepancies between what you report and what third parties (e.g., banks, clients) report to the IRS.
Pro Tip:
Even if you're selected for an audit, it doesn’t necessarily mean you did something wrong. In many cases, the IRS just needs clarification on certain items.
2. Types of IRS Audits
There are different types of IRS audits, ranging from simple mail audits to more complex field audits. Understanding what type of audit you’re facing can help you prepare.
1. Correspondence Audit (Mail Audit): This is the most common and least invasive audit. The IRS requests additional information about specific items on your tax return (e.g., deductions, income). You’ll mail the required documents to the IRS.
2. Office Audit: The IRS may ask you to visit a local IRS office for a more detailed review of your records. These audits focus on specific parts of your tax return.
3. Field Audit: This is the most comprehensive type of audit. An IRS agent visits your business to examine your financial records and ask questions about your tax return. Field audits are typically reserved for complex cases or larger businesses.
Action Step:If you receive an audit letter, check which type of audit it is and gather the necessary documents specific to what the IRS is asking for.
3. What Documents Will the IRS Request?
During an audit, the IRS will ask for documentation to support the information you provided on your tax return. Having well-organized records will make the process smoother.
Key Documents to Prepare:
Tax returns for the year(s) under review.
Receipts for expenses claimed as deductions (e.g., office supplies, travel).
Invoices for income received and services rendered.
Bank statements for both personal and business accounts.
Payroll records if you have employees.
Mileage logs if you claim vehicle expenses.
Pro Tip:
The IRS typically requests documents for the last three tax years, but it can look back further (up to six years) if it suspects fraud or significant underreporting of income.
4. How to Prepare for an Audit
If you’ve been notified of an audit, it’s time to get organized. Proper preparation can make the process less stressful and minimize any potential issues.
Steps to Prepare for an IRS Audit:
Organize Your Records: Gather all the relevant documentation the IRS has requested. Make sure everything is clearly labeled and organized by category (e.g., income, expenses, deductions).
Hire a Tax Professional: If you’re not already working with a tax advisor, now is the time to bring one in. A tax professional can help you navigate the audit process and represent you in front of the IRS.
Review Your Return: Go over the tax return being audited and make sure you understand the items in question. Be ready to explain the reasoning behind any deductions or credits you claimed.
Be Honest and Transparent:The best strategy during an audit is full transparency. If there are any mistakes or discrepancies, address them honestly with the IRS.
Action Step:
Consult with your tax professional to review your tax return and double-check that all your documents are in order.
5. What to Expect During an Audit
The length and complexity of an audit depend on the type and scope of the audit. Here’s what typically happens during the process:
Correspondence Audit: You’ll receive a letter requesting specific information. Once you send in the required documents, the IRS will review them and notify you of the outcome.
Office or Field Audit: You’ll meet with an IRS agent either at their office or your business location. The agent will ask for documents and explanations related to specific items on your return. Be prepared to answer questions and provide clarification on how you calculated certain deductions, credits, or income.
Audit Conclusion: After reviewing your information, the IRS will either accept your return as filed, propose changes (such as additional taxes owed), or—on rare occasions—refer your case for further examination. If you owe additional taxes, you can either agree with the findings and pay or dispute the results.
Pro Tip:
If you disagree with the IRS's findings, you have the right to appeal. Work with your tax professional to decide if pursuing an appeal makes sense.
6. What Happens After an Audit?
Once the IRS completes the audit, they’ll send you an audit report. This report details any changes to your tax return, including any additional taxes owed or refunds you’re due.
Possible Outcomes:
No Changes: The IRS accepts your return as filed, and no additional action is required.
Changes and Additional Taxes Owed:If the IRS finds discrepancies, they may assess additional taxes, penalties, or interest. You’ll have a deadline to pay or set up a payment plan.
Refund Due: In some cases, the audit may result in a refund if the IRS determines you’ve overpaid taxes.
Action Step:If the audit results in additional taxes owed, consider setting up an IRS payment plan to spread out the payments over time.
7. How to Avoid Future Audits
While there’s no guaranteed way to avoid an IRS audit, following best practices for accurate and compliant tax filing will reduce your chances of being flagged.
Tips to Minimize Audit Risk:
Be Accurate: Double-check your tax returns to ensure all information is correct.
Avoid Red Flags: Don’t inflate deductions or underreport income, as these are common triggers.
Keep Good Records: Always maintain detailed and organized records of all business transactions.
File on Time: Filing late can increase your chances of an audit.
Pro Tip:If you’re ever unsure about how to report something on your tax return, consult with a tax professional to ensure you’re filing correctly and avoiding unnecessary risks.
Getting audited can be stressful, but with the right preparation and support from a tax professional, it’s manageable. By staying organized, being transparent, and having a solid record-keeping system in place, you’ll be well-equipped to handle any IRS inquiries.
Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult a professional for advice specific to your situation.
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