Do you know what to expect from a small business audit?
There are a variety of reasons that you may need to go through an audit as a small business owner, and in every case, it can be stressful.
If you’re up for an audit, it’s essential that you know what to expect and that you’re well-prepared for everything that will be required of you.
Luckily, we’re here to help. Below we’ll tell you everything you need to know about small business audits.
What Is a Small Business Audit?
A small business audit is a close look and examination of all of the important financial statements, tax returns, and accounting books for your business.
An audit is performed to ensure that a company is remaining compliant with any applicable laws.
It ensures requirements that have been set by the local, state, and federal governments have been met.
While the IRS or an external auditor sometimes performs audits, businesses often perform audits on themselves as well.
Types of Audits
Several types of audits may be referred to as a small business audit. Here are the main types of small business audits:
The Internal Revenue Service (IRS) may audit a business if they identify a problem with your small business taxes. There are several ways in which the IRS may end up performing an audit, and it could be any one of the following:
- Mail Audits: A correspondence audit is one that is performed solely through the mail. The IRS will send you an audit notice by mail, and you’ll then need to respond with the requested information and records.
- Office Audits: Office audits are usually completed within about six months and will require you to visit an IRS office to submit necessary information and speak with an auditor.
- Field Audits: During a field audit, an IRS auditor will visit your business or your accountant’s office, where they’ll examine your financial records and documents. These audits are the most lengthy and may take up to one year to complete.
While IRS audits don’t happen very often, it’s best to be prepared for the possibility at all times. You should always ensure you’re remaining compliant with relevant tax laws for the best result.
External audits are audits that are performed by an individual that doesn’t work for your company.
This independent auditor will evaluate your business in an unbiased way and will usually be doing so for legal reasons.
You may get an external audit due to a requirement by an organization such as the SEC or OMB.
During an external audit, an auditor will go through the steps to analyze your business’s financial records and will then create a report based on what they find.
An internal audit is an audit that is performed by someone who does work for your company. An internal audit usually won’t be performed due to a legal requirement but may be done for your own purposes.
An annual audit can be helpful for examining your current processes and ensuring you’re remaining compliant with laws and regulations. It may also be used to inform investors and shareholders about current company performance.
Common IRS Red Flags
While there is no guarantee that avoiding audit red flags will prevent you from getting audited, it will help.
However, audits by the IRS can sometimes be random as well, so you never know for sure if you will or won’t get audited.
Here are a few things that may lead to an audit with a greater frequency, though.
- Claiming a high number of deductions
- Consistently filing late or missing deadlines
- Claiming business losses several years in a row
- Reporting a very high income
- Using round numbers instead of exact numbers
The most important thing to remember is that you should avoid placing anything suspicious in your tax return.
If your financial information seems unusual, you may attract unwanted attention.
What Happens During an IRS Audit?
So what happens during an IRS audit? Here’s the basic outline of what you can expect if you’ve been chosen by the IRS to be audited.
- The IRS Will Make Contact: If you have been chosen to be audited, you’ll receive a notice in the mail. This letter will list contact information, next steps, and any documentation they want to see.
- Follow the Instructions: After you receive a notice, you’ll immediately want to get organized and get ready for your audit. Assemble any necessary financial information and reach out to your accountant for help.
- Check-In With the Auditor: You’ll need to meet with an auditor in person, or you’ll need to reply with your information by mail.
- Outcomes: After an audit is performed, you’ll then find out what the outcome is. An auditor may not find any problems. Otherwise, they’ll notice problems with your financial documents, and you’ll either agree or dispute it.
While there are other details within this process, the above steps are what you can expect to happen when getting audited by the IRS.
Things to Do in Preparation for an IRS Audit
So what can you do to prepare for an audit, particularly when it involves the IRS? Below are a few things you’ll want to do to make sure you’re ready.
1. Keep Great Track of Your Finances
The main thing you can do to be prepared for an audit is to ensure you keep your finances organized in the first place. It’s much harder to get your business organized after it’s been a mess for a long time. Unfortunately, hindsight is 20/20.
If you’ve discovered that you’re being audited, you should do everything you can to get your financial records organized. Ensure that it’s all as complete as possible.
You’ll want to have all of your financial records, income information, deductions, and more at the ready and with all the proof you have available.
2. Anticipate Auditor Questions
You’ll do a much better job going through an audit if you can anticipate what the IRS wants to see.
You may get a hint of what the problem may be in the audit notice, depending on what documents they request and any other information they provide.
However, you may not know what the problem is. In this case, it may be well worth it to take a second look at your tax return.
If you discover any problems, you’ll know what questions an auditor is likely to ask, and you’ll be able to get any necessary information together ahead of time.
3. Ensure Professionalism
Nothing will be worse for your case with an IRS auditor than to treat them with hostility and to visibly show that you don’t want them around. Be sure that you’re courteous to any IRS auditors you speak with.
Like it or not, the way you present yourself may have an impact on how an IRS agent treats you during the audit.
Be sure that the presentation of your documents, your business premises, and your staff is as professional as possible.
What to Do If You're Facing an Audit
If you’re trying to prepare for a small business audit, it can be easy to get overwhelmed.
By considering the above information, you’ll make sure that the process goes as smoothly as possible.
Are you facing an IRS tax audit for your small business? Click here to learn how hiring a tax attorney can give you peace of mind.