First of all, it’s important to know the chances of your business getting audited during tax season are very low. There a few classic characteristics of a tax return that is more likely to be audited, but the thought of being audited should not be overwhelming because only a small portion of businesses are audited every year.
What is an Audit?
The audit process itself is, at its core, a second glance at what a small business submitted. Typically there is something submitted, whether it’s a high amount of entertainment and food deductions, vehicle claims, unusually high salaries, etc. which trigger the IRS to want to dig a little deeper into what is being filed. When that occurs, two types of audit can occur: a correspondence audit or a field audit.
Correspondence Audit vs Field Audit
A correspondence audit is when a small business is notified of a potential error or concern with the tax return in writing. In this scenario, the business would respond in writing with the necessary documentation to defend what was submitted or to make the changes. The other type of audit is called a field audit. In this scenario, the audit is done in person at either the local IRS location, your work, or your accountant/tax professional’s office. In both scenarios, you can have a business attorney to help you through the process.
What do Auditors Look at?
The notice from the IRS about the audit includes the individual auditor’s contact info that will be performing the audit, as well as information on what to do next. The notice will also include a list of the paperwork that the auditor will need to see. It’s important to do what the instructions say. While you or your small business’ accountant is filing your taxes, be sure to stay organized and not, as an example, throw receipts and invoices in a big box.
The auditor’s role is to check for errors and to ensure legitimacy and accuracy of all claims and details of the tax return. The documents the auditor will review include your company’s profit and loss statement, receipts, balance sheets and any other financial documents from the year, including bank statements.
The auditor may find that all of the information is correct, in which case no changes are need to be made to the tax return and you do not owe any additional money. The second outcome could be that there’s a mistake in the tax return that you or your accountant filed and you acknowledge it was an error. This situation would result in paying the additional taxes owed, as well as a penalty fee and interest on the taxes owed. On the other hand, if the error is in your favor, the government would refund any overpaid taxes. The third potential outcome of a tax audit would be the auditor finding an error and you disagree with the feedback. In which case, you are able to file an appeal with IRS for up to 30 days afterwards. Worst case scenario would be taking the IRS to court and suing them.
Don’t Face an Audit Alone
In theory, audits can be a scary thing, however with the correct accountant for your small business, you would have nothing to worry about. Additionally, the process itself has three outcomes, and while the potential tax penalties can be large, a seasoned and detail-oriented accountant would ensure beforehand there are no errors.
If you have questions about audits, how to avoid them, or what triggers typically heighten chances of an audit, talk to a trained professional, such as the bookkeepers at All About Businesses. Career accountants know how to properly dot I’s and cross t’s so you can rest easy knowing your business’ taxes are being filed correctly. Don’t let the fear of an audit of your business keep you up at night!
