The audit of your business tax return is conducted to verify the authenticity of the information that you have filed. Questions are posed and investigated regarding whether you included all your income and filed only for deductions that are permitted by the law. However, these audits are not conducted at random. Returns likely to have some errors are selected by the Internal Revenue Service (IRS) through intricate criteria. The audits begin within a year of filling and are completed mostly within that year.
Additionally, most audits are conducted in person by the IRS. These audits are very comprehensive and cover issues such as income tax, employment tax, and payroll tax. As such, proper preparation is crucial for the audit. The determination of the IRS agent is not final. You have the right to appeal against their decision.
Audit returns are conducted in 3 ways
As mentioned above, most business audits are conducted in person, i.e., they are 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 inspections are carried out to deem the authenticity of those records. It can take up to a year for a business audit to be completed. However, the audit time can be reduced if a business properly prepares for the audit with prompt responses to the requests and questions raised by the audit team. Audits can also be completed by mail, known as a correspondence audit, or at an IRS office and a desk audit.
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. You should be 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 very 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 IRS Questions
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 in the mail. However, Field and Desk Audits can be more complex. For these audits, 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 has already been requested by the IRS
- Prepare for any sort of questions that the IRS and the IRS Agent/Officer might ask
Essentially, you must be prepared to answer any sort of question-related to your financial activity that has occurred 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). Third-party records or other records must be used to reconstruct such documents.
Respond to any request for documents/information promptly and on time
- The IRS will increase the number of questions if they think it is necessary for you to change your returns. Suppose you get an Information Document Requests (IDR) that asks for more information about finances. In that case, it is important to respond by the deadline to avoid any sort of 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, be given a 30-day window to appeal their decision.