What you should know about business tax audits conducted by the IRS
- Most of these audits are conducted in person by the IRS.
- These audits are very comprehensive and cover income tax, employment tax, and payroll tax. Proper preparation is crucial for the audit.
- The determination of the IRS agent is not final. You have the right to appeal against their conclusion.
The audit of your business tax return 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 in them through a set of intricate criteria. The audits begin within a year of filling and are completed mostly within that year.
The returns of audits are conducted in 3 ways
- By mail: This type of audit is called a correspondence audit.
- At an IRS Office: This type of audit is called a desk or office audit.
- In-person: This audit is conducted at the site of your business or your 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 considered a physical inspection of all aspects regarding owners and their businesses. The IRS takes a close look at the accounting system and business records while physical checks are carried out to deem the authenticity of those records. It can take up to a year for a business audit to be completed (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) that are used 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 to have a licensed tax professional handle your audit-related tasks. You will need to provide your tax professional with the necessary facts to conduct the audit.
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 a relatively easy task. You will only have to prepare complete responses to the questions included in the audit letter you received via mail.
Field and office audits: These can be more complex. In this, you will need to:
- Prepare for the meeting session you will have with the IRS agent/officer who will be conducting the audit.
- Prepare and compile the information that the IRS has already requested.
- Prepare for any questions that the IRS and the IRS Agent/Officer might ask.
In simpler words, you must prepare to answer any question related to your financial activity that has happened 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 for reconstructing such documents.
Respond to any request for documents/information promptly and on time
- The IRS will increase the number of questions if they think you must change your returns. Suppose you get an IDR (Information Document Requests), which asks for more information about finances. In that case, it is important to respond by the deadline to avoid any suspicion on the IRS’ side.
- The IRS may tell you that items such as income and deductions have been misreported. If you disagree with their conclusion, you must represent your interpretation to the IRS.
- Finally, the audit is closed, with the IRS either recommending some adjustments to your returns or accepting your returns as they are. You would. However, you receive a 30-day window to appeal their decision.