Handling a Business Tax Audit
Facing a business audit can be stressful, but it’s important to stay calm and understand why it might be happening. Audits can occur randomly, but they’re often triggered by red flags in tax filings, such as high expense claims, incorrectly classified workers, or unusual deductions. While an audit doesn’t automatically suggest wrongdoing, it does mean the IRS wants to confirm the accuracy of your financial reporting and tax payments.
The type of audit your business undergoes will influence the process. A correspondence audit is the simplest and is handled entirely by mail, usually requiring you to submit copies of specific financial documents like receipts or statements. More in-depth are desk and field audits. Desk audits take place at an IRS office, while field audits occur at a location of your choosing, often your accountant’s or attorney’s office is best. Choose a date that gives you time to organize all relevant paperwork, such as contracts, accounting books, lease agreements, and financial statements. If your case involves potentially serious issues, such as suspected fraud or a large amount of unpaid taxes, it’s wise to involve legal counsel.
Review Your Records Carefully
When preparing for the audit, go over your tax return thoroughly. Make sure that the income, deductions, and expenses you reported are accurate and well-documented. Answer IRS requests, like Information Document Requests (IDRs), promptly, and only provide the information specifically asked for. Avoid offering extra documents or explanations unless directly requested. Your tax advisor can help represent you and ensure your responses are complete and compliant.
If you uncover any inconsistencies, you may need to reconstruct missing data or explain how you interpreted particular tax regulations. Being organized and responsive can go a long way in minimizing issues.
At the end of the audit, the IRS may either accept your return as-is or suggest changes. If you agree with their findings, you’ll sign the report and pay any taxes or penalties due. If you disagree, you have several options: you can ask to speak with a supervisor, initiate an appeal, or request mediation. Keep in mind that an appeal must be filed within 30 days.
Most audits are initiated within 12 months of filing and typically conclude in under a year. The IRS website provides helpful resources to assist businesses through the audit process.
By keeping detailed records and working closely with a tax professional, you can navigate the audit more smoothly, reduce the chance of future issues, and enhance your overall business compliance.
