For small business owners, few things invoke greater anxiety than IRS audits. Here’s the good news: According to USA Today, the number of IRS audits in 2016 on individual tax returns was just 0.70 percent, the lowest it’s been since 2003. And a mere 0.49 percent of federal tax returns filed by small and large corporations, partnerships, and S Corps were audited.
That being said, you may still want to err on the side of caution and spend some time understanding IRS audits in case it happens to you. To help you prepare, the IRS has created an easy-to-follow informational video called “Your Guide to An IRS Audit” so you can get your head around exactly what an IRS audit for a small business would entail.
What’s in the IRS Audit Video?
Divided into 10 lessons using three hypothetical small businesses as examples of audits, the hour-long IRS video spans important topics such as:
- Why you may have been selected for an audit
- How to prepare for an audit
- Your rights if you get audited
- Whether you should get a representative
- Which records you need for an audit
- How these records should be organized
- What happens when you have an audit at an IRS office versus at your location
- What “fast track mediation” is
- What happens during your first appointment
- What happens if you agree or disagree with changes
- What are your options to pay if you agree with changes
Let’s go over a few key topics covered in the video.
Why Your Return May Have Been Selected for an IRS Audit
According to the IRS, your tax return may have been selected for an audit due to random selection and computer screening. Once submitted, your tax return is compared against “norms” for similar returns. You may also be selected because of a business relationship—if a business partner or investor’s returns were chosen to be audited, your business could be as well.
It’s important to remember that just because your return was picked to be audited doesn’t necessarily mean something is wrong with it. Nor does it mean that you will definitely have to pay additional taxes. It just means the IRS will be doing some additional checking.
What to Do If Your LLC Gets Audited
Which Documents to Keep for an Audit
In the case of an audit, the IRS will send you a list of documents you’ll need to provide, which may include copies of:
- Canceled checks
- Legal papers
- Loan agreements
- Schedule K-1
- Tax returns from at least three years prior
The IRS may accept some electronic records generated by tax software, such as TurboTax and QuickBooks.
And if you filed a Schedule C, you may also be required to fill out questionnaires on expenses relating to your travel, meals, entertainment, vehicle, repairs and maintenance.
Know Your Rights During an Audit
Per the video, the IRS will not disclose to anyone the information you provide during an audit except as authorized by law. You’re also entitled to professional and courteous service and representation, and you have the right to ask the Office of Appeals to review your case.
If it is found that you owe more taxes, you only need to pay the correct amount of tax. If you need help with an unresolved tax issue, you can reach out to the Taxpayer Advocate Service at 1-800-829-4059.
Are LLCs Audited More Than Sole Proprietorships?
Per Marketwatch, in 2014, 1.9 percent of individuals who filed a Schedule C and had gross receipts of $25,000 to $100,000 were audited. Individuals who had over $100,000 in gross receipts had a higher rate of audit at 2.3 percent.
However, the odds of IRS audits if you filed your taxes as an S Corp, partnership, or multi-member LLC (rather than as a sole proprietorship or a C Corp) were even slimmer: a mere 0.4 percent.
How to Avoid an IRS Audit
As you can see, the chances of your small business being audited are pretty low. That being said, it doesn’t hurt to do everything in your power to prevent an audit from happening in the first place. According to Intuit, you’ll want to double-check your figures before filing, be honest with all the information you provide and be realistic in your deductions. Conflated or unrealistic deduction or income figures could trigger an audit.
If you want to learn more about LLC audits or the differences in paying LLC taxes versus S Corporation taxes, you can check out more articles in our Learning Center. Incfile can also file your business taxes for you if you want extra help making sure everything is done correctly.