IRS Business Tax Audits

IRS Business Tax Audits - Complete Controller

What You Should Know About Business Tax Audits Conducted by the IRS

  1. Most of these audits are conducted in person by the IRS.
  2. These audits are comprehensive and cover income, employment, and payroll taxes. Proper preparation is crucial for the audit.
  3. The determination of the IRS agent is not final. You have the right to appeal against their conclusion.

Your business tax return audit is conducted to verify the authenticity of your filed information. These audits are not shown at random. The IRS selects returns likely to have some errors through a set of intricate criteria. The audits begin within a year of filing and are completed mostly within that year.

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The Returns of Audits are Conducted in 3 Ways

  1. By mail: This type of audit is called a correspondence audit.
  2. At an IRS Office: This type of audit is called a desk or office audit.
  3. In-person: This audit is conducted at the site of your business or home and is known as a field audit.

As mentioned above, most business audits are conducted in person, i.e., mostly field audits. Field auditing is an extensive task and is considered a physical inspection of all aspects regarding owners and their businesses. The IRS closely examines the accounting system and business records while physical checks are carried out to deem the authenticity of those records. A business audit can take up to a year to complete (in most cases). However, you can reduce the audit time if a business adequately prepares for the audit with prompt responses to the requests and questions raised by the audit team.  

While the audit is being conducted, the IRS requires you to submit all necessary documents (such as bookkeeping records) to determine your financial position. It would be best if you were accurate and precise when providing the information requested by the IRS. It is recommended that you have a licensed tax professional handle your audit-related tasks. You must provide your tax professional with the necessary facts to conduct the audit.

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Understanding the Scope of an Audit

The scope varies according to the type of audit being conducted. Here is what you should keep in mind:

  • Mail Audits are extremely limited. They include a check on a few items mentioned in the audit letter that the IRS mails you.
  • Office Audits go into more detail. They are generally less complex than field audits, but they may have a scope like that of a field audit in certain situations.
  • Field Audits are the most time-consuming. They include questions that probe into the activities of your business and your business’s financial position. It is a wise decision to hire the services of a tax professional to represent your business in front of the IRS.

Preparing Responses to Questions Asked by the IRS

Mail audit: Preparing for a mail audit is relatively easy. You will only have to prepare complete responses to the questions in the audit letter you received via mail.

Field and office audits: These can be more complex. In this, you will need to:

  1. Prepare for the meeting with the IRS agent/officer conducting the audit.
  2. Prepare and compile the information that the IRS has already requested.
  3. Prepare for any questions the IRS and the IRS Agent/Officer might ask.

In simpler words, you must prepare to answer any question related to your financial activity during the year for which you are being audited. You will also need to recreate documentation for anything that is not documented (or if relevant documents have been misplaced). You must use third-party records or other records to reconstruct such documents.

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Respond to Any Request for Documents and Information Promptly and on Time

  • The IRS will ask more questions if they think you must change your returns. For example, suppose you get an IDR (Information Document Request) asking for more financial information. In that case, it is important to respond by the deadline to avoid any suspicion on the IRS’s side.
  • The IRS may tell you that income and deductions have been misreported. If you disagree with their conclusion, you must present your interpretation to the IRS.
  • Finally, the audit is closed, and the IRS either recommends some adjustments to your returns or accepts them as they are. You would. However, you have a 30-day window to appeal their decision.
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