What to do if IRS Audits Your Business
Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to feel stressful or disorganized. In this article, we’ll discuss a set of steps business owners can take if they find out they are being audited by IRS.
Familiarize Yourself With Common Audit Triggers
The first question many business owners may have when being audited is simply: why is IRS choosing to audit my business? By knowing and understanding common audit triggers, taxpayers can understand how to prevent future audits as well as gain more insight into what caused this audit to occur.
Businesses are more susceptible to an audit if they:
- Have foreign assets
- Have a cash business
- Are self-employed
- Have a home-based business
- Claim a disproportionate number of deductions
- File incorrect or incomplete returns
- Have a large number of cash transactions
- Earn less than $25,000 or more than $500,00
- File a Schedule C
- Claim a vehicle as 100% business expense
- File taxes late
Review the Audit Letter Carefully
Take time to fully read the audit letter and consider hiring a professional, such as a tax attorney, to help walk you through it. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is.
*Taxpayers should note that IRS does not send emails or phone messages to notify taxpayers of an audit. These types of communication may be a scammer attempting to retrieve personal information or data.
Understand the Type of Audit IRS is Conducting
IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
IRS has several different ways of auditing businesses. There are two primary forms of audits: correspondence and field audits.
Correspondence Audits
Correspondence audits are the most common type of audit. This form of audit is generally considered to be easier to navigate than a field audit. Why? A correspondence audit occurs when there are errors on the business owner’s tax returns and IRS identifies these errors.
As a response, IRS sends a letter that describes each of these mistakes in detail. The business owner can respond and correct or explain the error through sending additional information to IRS.
Field Audits
A field audit is more thorough than a correspondence audit. Auditors will visit a business site in person. In this case, the auditor will examine financial records and compare them to the business owner’s return.
Prepare the Paperwork
IRS should list the information it requires in your audit letter. Once you know what information IRS needs, you can collect all of the records and supporting documentation requested (but nothing additional). For example, you may need to submit records such as:
- Bank statements
- Receipts from vendors, and businesses you have worked with
- Invoices
- Pay stubs
- Payroll records
- And other information
You can view a list of records IRS may request here.
Answer the Auditor’s Questions
In the case of a correspondence audit, send in the requested documents to correct the error on your tax return or to provide the necessary information to complete it. In the event of a field audit, you will have an interview with an auditor as they visit your business in-person.
In this interview, the auditor will ask questions about your tax return. We suggest being as straightforward and clear as you can. We also advise against volunteering any information or accounting records you are not required to give, including previous years’ tax returns, just to keep the process as simple as possible.
Consider Contacting an Experienced Tax Attorney
The combination of a tight deadline, little to no room for mistakes and potentially severe consequences can be a lot for a taxpayer to handle alone and lead to a poor interaction with IRS. This is why we suggest letting your tax professional do the talking for you.
An experienced tax attorney can help guide you through the process and ensure you are timely, responsive, and compliant.
Additionally, tax lawyers offer attorney-client privilege, whereas other tax professionals, such as CPAs, do not. Therefore, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
Facing an IRS Audit?
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS, tax audits and tax issues. are experts in defending business owners in the face of IRS or other government agency audits.
Is your small business ready for an audit? We dive into five signs your small business is ready for an IRS audit, here.