The IRS audits small businesses every tax year for different reasons. The audit process is simple for some companies, but other audits can be a lot more serious and thorough.
Business audits can vary in depth and severity, so you’ll want to know how you can best prepare yourself. You have the right to know why you’re being audited and the right to work with a tax professional. Here’s what you should know about audit defense for business taxes.
Why Would the IRS Audit a Business?
The IRS audits businesses for many reasons, but there are five common reasons the IRS would audit your business.
First, your business may receive an audit through computer screening and random selection. The IRS will compare your tax return versus random tax returns from other returns in similar industries in these circumstances. The IRS will use this information to update how they select future tax returns to audit.
Second, you may also receive an audit because of your interaction with other taxpayers. The IRS can select tax returns for an audit when they suspect issues or transactions with other taxpayers. This is more common for transactions between business partners or investors.
The IRS may audit small businesses for additional reasons:
- Claiming too many charitable deductions
- Deducting too many business expenses
- Not reporting accurate numbers on your tax return
Steps To Take To Prepare For a Small Business Audit
There are three steps you’ll take to prepare for a small business audit. The chances of having an audit are small, but for small businesses experiencing a small business audit, audit defense for businesses taxes will help small business owners.
1. Anticipate IRS Questions
The first step in preparing for a small business audit is to anticipate what questions the IRS might ask. There are different audit types the IRS may want you to provide answers for, so the exact questions you’ll receive can vary.
There are four types you may experience, each with different potential questions:
- An audit letter
- An office audit
- Field audits
- Line-by-line audits
Audit letters will contain information asking about documentation. You may also see this audit used as a correspondence audit.
Audit letters may require you to answer questions about issues on your tax return, such as charity donations, deductions, or expenses. You can mail the proof the IRS requires for audit letters to resolve the problems with an audit letter.
The next potential audit you may receive is an office audit. You’ll receive a letter requesting an in-person visit to an IRS office. This level of audit allows you to bring a tax professional on a specified date, and together, you and your tax professional can answer questions.
Field audits are another audit that the IRS can issue. You’ll receive an audit letter first containing additional information about how to set up a field audit. You can set up a date and time for an IRS to visit to conduct an audit.
During a field audit, an IRS agent will visit your home or place of business. Field audits are rare, and you can also work with a tax professional to answer questions the IRS may have.
Finally, line-by-line audits are the last type of audit you may receive. This audit can happen to any taxpayer, but they are very rare. The IRS issues these audits for data purposes, but the questions you may receive will involve every line of your tax return.
If you’re chosen for a line-by-line audit, the IRS will review every line of your tax return. If the IRS finds discrepancies, you may also owe additional interest, penalties, and taxes.
2. Gather and Provide All Necessary Paperwork
The second step in preparing for a small business audit is to organize your paperwork. This will help you if the IRS asks you to provide them with documents.
The IRS conducts audits with documents you’ll send by mail or through an in-person interview. The exact way you’ll send your necessary paperwork varies based on how you received your audit:
- If the IRS conducts your audit by mail, you’ll mail your documents to the address on your notice.
- If the IRS conducts your audit in person, you’ll bring records with you.
- If the IRS doesn’t require original records, you can send them copies.
You may have another requirement to complete a questionnaire for audits sent to you by mail. In this situation, common questionnaires you may have to complete include:
- General Questionnaire
- Car and Truck Questionnaire
- Travel, Meals, and Entertainment Expense Questionnaire
- Repairs and Maintenance Questionnaire
You’ll also need documentation to the IRS, which they’ll use to speed up your audit process. The IRS may request you to send records such as:
- Canceled checks
- Dental and medical records
- Employment documents
- Legal papers
- Loan agreements
- Schedule K-1
- Theft or loss of documents
Finally, as you provide your records during an audit, the IRS suggests that:
- You must also include the circumstances behind the documents with any paperwork you send.
- You should organize records by year, income or expense type.
- You should also include a summary of transactions.
3. Work with a Tax Professional on Your Audit Defense
The last step to take to prepare for a small business audit is to work with a tax professional. When the IRS subjects an individual or business to an audit, that person has the right to representation by a professional, whether that’s a Certified Public Accountant, Enrolled Agent, or lawyer. Tax professionals are trained to handle audits and can help your business with the audit process.
There are different tax audits that can affect your small business with increasing levels of potential severity. Working with a tax professional can help you resolve any cause for a tax audit.
Get Peace Of Mind for Your Small Business with Audit Defense
As a small business owner, peace of mind is one of the most important gifts you can give yourself. Rather than trying to tackle an IRS audit on your own, turn to a trusted professional who knows the ins and outs of the audit process.
A tax professional will help you work through the different possible audits and the documentation you need. They’ll also guide you through the process of resolving tax issues with the IRS.
Work with the tax audit experts at 1-800Accountant for your audit defense small business needs.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.