Navigating a Business Tax Audit
If your business is being audited, take a deep breath and understand the reasons behind it. Audits may be random or triggered by issues specific to small businesses, such as excessive expenses, misclassified employees or questionable deductions. While an audit doesn’t necessarily mean you’ve done something wrong, it is the IRS’s way of verifying your reported information and ensuring that the correct taxes have been paid.
Audits can vary in complexity. A correspondence audit is conducted through written communication and may only require copies of receipts or bank statements to resolve. In contrast, desk or field audits involve face-to-face meetings with an IRS representative to address discrepancies. Desk audits will always be held at an IRS office, but you can choose the location for a field audit; it’s a good idea to select a venue such as your accountant’s or attorney’s office. Schedule the audit at a time that allows you to gather necessary documents such as invoices, bank statements, accounting records, leases or property titles. If the IRS believes that your business engaged in fraud or owes a significant amount in taxes, it is advisable to have your attorney present.
Check the details
To prepare for the audit, confirm the accuracy of your tax return, including reported income, deductions and expenses. Respond promptly to all IRS requests, including Information Document Requests, and provide exactly what is asked for (but do not volunteer additional information). Collaborate with your tax professional, who can advocate for your position and ensure compliance. If discrepancies arise, you may need to reconstruct missing documents or clarify your interpretation of tax laws.
At the conclusion of the audit, the IRS may make no changes or may propose adjustments. If you agree, sign the examination report and pay any additional taxes or penalties. If you disagree, you can request a conference with the IRS manager, file an appeal or pursue mediation. You must file the appeal request within 30 days.
Typically, audits begin within a year of filing and are resolved in less than a year. The IRS offers a variety of materials on its website that can be used to prepare for the audit process.
Maintaining thorough records and consulting with a tax professional can simplify the audit process and help prevent future issues while improving your business’s efficiency and compliance.
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