For years, small businesses have enjoyed relatively low audit rates, but that’s about to come to an end. The IRS recently announced they will increase small business audits by 50% in 2021 and have begun intense hiring operations to ensure they have plenty of specialized auditors to do the deed.
Whether you own a mom-and-pop shop, an online business, or are self-employed, the IRS will be looking at your financial records very closely this year — and in the future. Further, since recent tax law changes and COVID-19 stimulus programs have made bookkeeping more challenging and complex than ever, you might have made several mistakes without even realizing.
So, in today’s blog, we’re going to examine what a small business IRS audit is, what could trigger one, and how the process usually works. The goal is to prepare you for the worst-case scenario and arm you with the tools you need to avoid or endure this difficult process.
Let’s jump right in.
A small business IRS audit is an examination undertaken by the IRS into a company’s financial records and tax filings to verify the accuracy of their annual returns. There are several reasons the IRS might be auditing you (see below), but many audits are triggered by random selection via a computer screening.
These reviews aren’t necessarily an implicit determination of wrongdoing, as some businesses occasionally improve their tax situation. But regardless of the outcome, the process itself can be extremely stressful, bureaucratic, and time consuming.
Although the IRS insists that small businesses are chosen at random, we’ve noticed several specific instances that seem to make companies more likely to be selected for an IRS audit.
In addition, you should follow these tips to avoid an IRS audit.
Related Content: Everything You Need to Know About IRS Audit Reconsideration
Once the IRS has chosen your small business for an audit, an auditor will review your tax return. If they don’t see anything suspicious, they will simply accept the return. If they do, however, they will forward their findings to an examining group for further consideration. Meanwhile, they will send your business a notice of the audit in the mail.This notice will include all relevant instructions and contact information in this letter. (The IRS will never notify you of an audit over the phone.)
From there, the IRS will handle the audit by mail or in-person, often showing up unexpectedly at your home or place of business to conduct the interview. If they choose to conduct the audit by mail, the initial notice will include a request for additional documentation — such as income records, expenses, and itemized deductions. If you have too much documentation to proceed by mail or feel it’s just too difficult or inconvenient, you can request an in-person audit — preferably at a tax attorneys office.
Every business is required by law to keep their financial records for at least three years after a tax filing date, so hopefully you should have everything you need at your disposal. If not, you’ll want to contact an experienced group of tax professionals for further assistance dealing with the IRS.
An IRS audit will come to one of three final conclusions:
If you disagree with the IRS’ findings of your small business audit, you can request a conference, mediation, or even file an appeal — assuming there’s enough time remaining on the statute of limitations to do so.
The first thing you’ll want to do in the event of receiving an audit notice from the IRS is to contact a proven and reliable tax attorney. These professionals will advocate for you throughout the process and handle all communications, documentation, and dealings with the IRS.
You’ll also want to know:
At S.H. Block Tax Services, we have been helping small businesses prepare for and navigate IRS audits for decades. Our skilled and dedicated tax attorneys and bookkeepers are here to help you get everything in order to prepare for a small business audit and fight on your behalf to ensure fair treatment and the best possible outcome.
Please call (410) 872-8376 or complete this brief form today to schedule your free consultation with one of our skilled tax attorneys.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
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