Whether you’re a small or medium business owner, most likely you have more trepidation over an impending audit that you do about preparing your annual taxes. It’s important to remember that the burden of proof lies with your company, so if the IRS knocks on your door, you must be able to provide accurate evidence of your income and expenses.
Your chance of getting audited is relatively low; it only happens to around 1% of taxpayers. However, if you’re a small business, your chance of an IRS audit increases to around 2.5%. The simplest way to avoid an audit is to make sure you don’t inadvertently make any errors on your tax form, such as mathematical mistakes when calculating expenses and income.
Types of IRS Business Audit
Although many business owners are not aware of the fact, there are three types of IRS audit. These include:
- Correspondence audit: In this case, the IRS will request additional information from you, and you will be required to mail the documentation to them. This is the most common form of audit and you will not be asked to meet with an IRS agent.
- Field audit: This is a more comprehensive audit. An IRS agent will visit your company and examine your business records.
- Office audit: This type of audit requires that you visit and IRS office to meet an agent. You will have to present documentation of your business accounts.
Red Flags for the IRS
Although the chances that the IRS will audit your business is low, there are certain red flags that can increase the likelihood that you will be audited. These include:
- Totaling your expenses to a round number
- Not including corporate employee salaries
- Excessive travel and meal deductions
- Several years of business losses
5 Tips for Preparing for a Painless Business Audit
You don’t have to break out in a sweat if you are notified of an audit. Here are five ways you can easily prepare for the situation to make it as painless as possible.
Talk to a Business Audit Tax Professional
As soon as you receive notification of an audit from the IRS, whichever type of audit it may be, you should consult a tax attorney or certified public accountant. These individuals are qualified to represent you to the IRS and have the qualifications and experience to help you prepare for the audit. They will be able to answer any questions you have and address any concerns, which will make the whole process much quicker.
Get your Accounts in Order
If you haven’t already, it’s high time to get your books in order. Using software such as QuickBooks will make this process so much easier. It will also help your company bookkeeper avoid mistakes. You will need to provide itemized documentation related to the income, expenses, deductions, and losses that you reported on your tax return. Try to reproduce lost or destroyed records, but don’t be tempted to make them up.
Provide the Required Information
Your IRS agent will make it very clear what information he or she wants to see. Don’t be tempted to provide any more information that you are asked for. Your opinions or explanations will not count towards your audit and may only worsen your situation.
Be aware of the Difference Between Errors and Intentional Nondisclosure
Genuine mistakes can be made during the bookkeeping process and when filing a tax return. However, intentional action to reduce your company taxes – known as tax evasion – is illegal. If you can show that any highlighted issues are genuine, for example, you are missing records for a particular year, the IRS will be more understanding. Tax evasion incurs serious fines and possibly imprisonment.
Be Prompt
You will hear from the IRS within plenty of time of your audit date; giving you the chance to prepare everything you need. To make sure you have your bases covered completely, it’s a good idea to gather the information for the complete tax year, even if your auditor only requests some of it.
If you have received a letter from the IRS notifying you of an audit, don’t panic. Get advice from a professional and provide all the information requested promptly. To avoid the stress of future audits, make sure you keep good financial records.
