Receiving a letter from the Internal Revenue Service informing you your business is being audited is enough to stop you cold. But if you have taken the proper steps to prepare and work with your auditor to the best of your abilities, you shouldn’t have anything to sweat about.
Why was my business selected for an audit?
It’s important to recognize legitimate businesses on top of their finances get audited from time to time. This is not an indication you’ve done anything wrong, just that you’ve tripped some trigger that makes the IRS seek more information on your business.
According to The Hartford, you are more likely to be audited if you run a business that has a lot of cash transactions. That’s why it’s critical you comprehensively document all transactions regardless of how the customer pays and keep a record of those transactions. If you can produce paperwork that verifies the information on your return, your audit will likely be quick and painless.
How are business tax audits conducted
The IRS will notify you by mail if your business is being audited. The audit proper, the IRS notes, will take place either by mail or via in-person interview. The latter may take place at a regional IRS office or a location convenient to you like your home or office. You can also opt to have the audit conducted at your accountant’s office.
When you are being audited, the IRS will provide a written request for specific documents, including electronic records. Any of the documents requested by the IRS should be among those used to prepare your return for the tax year in question.
The IRS notes you are required by law to keep records for at least three years. Audits are not conducted for any tax returns beyond that range unless a significant issue is found. Even then, the IRS states it typically won’t go beyond six years of tax returns. AARP’s Nancy Dunham suggests keeping up to seven years of tax returns just to have your bases covered, and she recommends safely disposing of any tax records beyond that window.
If your audit is conducted by mail, the IRS advises sending documents with a service that uses tracking and insurance. You should also add a service like signature confirmation or a return receipt to ensure the IRS gets what it needs.
What happens at the conclusion of an audit
Per the IRS, there is no definitive timeframe for the completion of an audit. This varies based on things like scheduling and availability as well as the scope and complexity of the issue.
Once an audit is finished, the IRS will present you with its findings in an examination report or similar form. There are three outcomes to an audit, the most desirable of which is no changes to your original tax returns. If the IRS recommends changes, you have the option to agree or disagree with the audit findings.
Agreeing with the audit is as simple as signing the report and other provided documents. If it’s determined you owe the IRS more money, your auditor should offer information on the collections process. If you disagree with the results, you can request a meeting with an IRS manager or file an appeal. This does not guarantee a change in result, but it gives you a fair avenue to contest the findings.
Being audited by the IRS is not pleasant, but it’s not so uncommon that it should cause you to panic. Make sure that you are keeping all important documents for tax-filing purposes and you should be able to move through the process quickly and efficiently.