Nobody wants to get that letter in the mail ― the one marked with those three big letters, “I-R-S,” announcing that your financial history is being reviewed by the federal government. Dealing with the IRS in any extended fashion can be a nerve-racking prospect, especially when you know they’ll be auditing your very livelihood. However, like most things in life, the fear and anticipation of an audit is usually worse than the event itself. A healthy dose of planning and preparation can make your small business audit a smooth process that’s free of unnecessary delays or financial harm to your business’ operations and bottom line.
Why Would the IRS Select Your Business for an IRS Audit?
When preparing for a small business audit, you might find yourself asking yourself some difficult questions — the first of which is likely some variation of “Why me?”
The good news is that if you don’t know the answer to that question immediately after asking it, you likely haven’t done anything wrong (at least not intentionally). If you’re feeling unsure about why you’re being audited, though, it also means that you and your tax attorney probably have some work to do to uncover any errors that might exist on your federal or state tax returns or to prove that the IRS has made a mistake.
As for potential reasons behind an audit, here are just a few of the financial practices that could increase the likelihood of your small business being audited:
- Running a cash-intensive business, such as a restaurant or car wash
- Excessive deductions for questionable expenses like meals or entertainment
- Claiming 100% use of a company vehicle
- Filing and paying your taxes late year after year
- Paying inflated salaries to employees who are also owners or shareholders
- Large reimbursed business expenses
- Large amount of charitable contributions
If any of these apply to your business, you may want to reconsider these practices. Making some minor changes to your operations could significantly lower your risk of being flagged for an audit through the Internal Revenue Service’s computer system (if you haven’t received notice of one already).
If you choose not to make these changes or if it’s simply not feasible to do so in your case, then be prepared to deal with a potential audit — perhaps even on an annual basis. Of course, while no one enjoys an audit, it’s really nothing to fear if you’ve taken the proper precautions and you have nothing to hide.
Steps to Take When Preparing for a Small Business Audit
We strongly suggest that you seek out the assistance of an experienced tax attorney when preparing for a small business audit. At S.H. Block Tax, our team of tax professionals has years of experience dealing with the IRS and the state of Maryland, and we’re well-equipped to handle any obstacles that might arise in your case.
If you choose to go it alone, however, the following steps can help you mitigate the damage and get back to focusing on day-to-day business operations as soon as possible.
- Keep Good Track of Your Finances: If you’re following approved accounting practices throughout the year, you likely won’t have to worry about an audit after filing your taxes. Additionally, the less time you spend reconciling your books and discovering potentially damaging errors, the more time you’ll have to focus on the daily operations of your business.
Make a commitment to review your financial accounts on a regular basis and maintain accurate records all year long. Even if you still get audited, at least you will have all of your information up-to-date, which will save you valuable time if the notice arrives in the mail.
- Anticipate Their Questions: The IRS doesn’t want to comb through every last detail of your finances any more than you do. Most likely, they flagged you for an audit based on a particular issue or set of issues they found, and their questions will probably focus on these areas.By thoroughly reviewing your financial information before the audit officially begins, you might be able to find and anticipate their potential areas of interest. Furthermore, cooperating with the IRS by coming forward with problem areas in your books and the associated financial documents may lessen their suspicion of fraud on your part and expedite the audit process.
- Gather and Provide All the Necessary Paperwork: Right off the bat, the IRS will request a list of documents from you. You’ll want to gather and provide all of this paperwork before any deadlines are imposed to speed things up, garner a modicum of good will, and avoid any suspicion of fraudulent behavior.
The following is a list of documents the IRS will likely want to see, although it’s certainly possible that your assigned agent will want to view items that are not on this list.
- Bank Statements and Receipts ― You will be required to present bank records from professional accounts (and possibly personal accounts), as well as receipts and cancelled checks.
- Electronic Transaction Records ― Electronic records and statements are now accepted by the IRS, but they must include the name and address of the payee, the date, and the amount.
- Books, Ledgers, and Journals ― Your business is not required by law to keep formal books, but if you do, you may be required to provide them to the IRS.
- Appointment Logs ― If you own a service-based company such as a hair salon or auto shop, you will want to provide your appointment log or calendar to substantiate the existence of the client and the charge.
- Equipment Records ― Assets that are used for both personal and professional purposes (cell phones, computers, etc.) are considered “listed property,” and records pertaining to these items can be requested by the IRS.
- Vehicle Records ― If you use your personal vehicle for business purposes, you must substantiate the work-use portion, so it’s best to keep a travel log as well as gas and repair receipts in case of an audit.
- Travel and Entertainment Records ― Out-of-town business expense require both a receipt and a note of explanation for the expense. This includes food, drink, entertainment, and any other business-related expenditures incurred while traveling or entertaining clients.
Following the steps listed above should create a smoother experience for you in the event of an audit, and they will also help you establish some much-needed credibility with your IRS agent. Still, these tips are just the beginning of what you’ll need to make it through a small-business audit without running into complications, and we highly suggest consulting an experienced tax attorney like Stanly H. Block to assist you if you’re being audited.
More importantly, consulting a good tax attorney can help you avoid an audit in the first place. At S.H. Block Tax Services, we’ll not only help you get through an audit with the least amount of pain and stress possible, but we’ll also show you how to set up your business and accounting properly to avoid future run-ins with the IRS.
Contact S.H. Block Tax Services for Help with Your Small Business Audit
If you have recently received a notice in the mail informing you of the IRS’ intention to audit your small business, please contact S.H Block Tax Services by completing this brief form or by calling us at (410) 793-1231. We will deal with the auditor directly (in most cases, our clients never have to meet with the state or the IRS), prepare documents and arguments on your behalf, and negotiate and settle any claims with the IRS.
Even if your audit has already concluded, we can potentially help you through the appeals process, and we can also help you update your accounting and business processes to help protect against another audit in the future.
Being audited by the federal government can be a stressful and frustrating ordeal, but at S.H. Block Tax, we use our decades of tax law experience to make the process as streamlined and pain-free as possible. Please contact us today for a free consultation if you need help!