Albert Einstein once said that “the hardest thing to understand in the world is the income tax.” Even the world’s most famous theoretical physicist conceded to the complexities of the IRS code and tax filing system. Still, filling tax returns is something that millions of small business owners do every year. And every year, a number of these business owners must deal with the possibility of an IRS audit.
Either due to discrepancies in tax filings or as a result of a random check, all business owners should be prepared for a potential IRS audit. Though the reality of a tax audit can be worrisome to a business owner, there are ways that small businesses can prepare and organize for a possible audit.
How to Avoid an IRS Audit
According to the IRS Data Book, about 1 percent of businesses get audited. Knowing this, it is important to be aware of your tax responsibilities and potential liabilities.
In many cases, there are triggers that initiate an audit. Some of these triggers that mark businesses for an audit include:
- Messy and inaccurate returns. If your tax return is sloppy and your numbers do not add up and include errors, there is a good chance that your business will be marked for an audit. Keep your submitted tax filing neat, free of error and avoid rounding your numbers. Easy-to-avoid mistakes can help keep your filing from any added scrutiny.
- Suspicious deductions. Do not play around with your deductions. Keep your deductions accurate and do not tack on personal expenses. Excessive home office and entertainment deductions should also be avoided, especially if there is no good reason why they went above and beyond the numbers reported in previous years.
- Not filing on time. This is simple enough. If you need more time, file for an extension. Also check with the IRS website for any extensions to the filing date. For 2020, the deadline was extended by three months to July 15.
- Not reporting all business income. Be smart. Keep a record of all the income your business has earned. Even if it’s an honest oversight in forgetting to report all your income, it will not be seen that way if you get audited. The IRS receives copies of all your tax forms, and its automated system will easily detect discrepancies.
Aside from taking personal responsibility to meet the points above, a tax professional can be a safeguard in avoiding an audit. Having a tax professional prepare your returns can help save you time, headache and the possibility of having an issue with the IRS should you get audited.
Audit Guidance from the IRS
The IRS has created a series of convenient and easy-to-use videos to help assist taxpayers.
This video covers critical concerns business owners might have, such as preparation of tax records, what to expect during an audit, payment options, the right to appeal a decision and responsibilities during and after and audit.
Helpful guidance can also be found in Publication 3498A, available on the IRS website. Specific advice to commonly asked questions is also available for small business owners and self-employed workers.
How to Deal with a Tax Audit
Nearly 1 million total audits were conducted in 2018. While most audits are random, inconsistencies and discrepancies in your filing will get your audited as well.
Accepting this reality is the first step in dealing with a potential audit. Here's what to do if your small business gets audited:
- Review the official IRS correspondence. The IRS will only notify you by mail if you've been selected for an audit. Read the letter closely, which will request specific documents and provide instructions. Your audit will either take place by mail or an in-person interview.
- Gather all of your documents. You should always hold on to at least three years' worth of records. That includes your bank statements, expense receipts, automobile records, property expenses and register receipts. Your letter from the IRS will tell you what specific documents they want to see.
- Submit paperwork. Once all the paperwork is in and all the questions are answered, the IRS will review all the submitted documentation and may either make an adjustment to your return or leave your filing as is. You will receive a letter outlining their findings.
- Appeal if needed. If you disagree with the IRS findings, you can ask for an appeal within 30 days of receiving the IRS report. Consider finding a tax attorney to help. Although this as an expense, having an attorney will help you navigate through an audit.
- Sign the report. If you agree with the audit findings, you will sign the report from the IRS. If you owe money, you will follow the collection process.
Tax Audit Status for 2020
Earlier this year the IRS announced a number of options to assist taxpayers affected by the COVID-19 pandemic and the resulting economic instability.
Known as the People First Initiative, the program includes a halt to office, field and correspondence audits through July 15. However, ongoing cases will continue to be reviewed and appeals will be processed, though not through in-person meetings.
Despite this suspension of tax audits in 2020, the IRS still requests taxpayers to respond to any correspondence sent during this time.
Getting IRS Audit Help
If your business tax return is flagged for an audit, help is available. Incfile’s Business Accounting and Bookkeeping service can take care of all your tax, accounting or bookkeeping needs. Since 2004, Incfile has assisted over 250,000 entrepreneurs and has the expertise to help business owners navigate through tax season and the maze of a potential audit.
Peter Mavrikis
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.
