Small businesses have to pay income taxes, which are subject to audits from the IRS. Sometimes, business owners can trigger audits, and other times, they are completely random.
Audits can be time-consuming, costly, and stressful! What action steps can you take to avoid audits, and what steps should you take if you’re notified that you’ll be audited – even if it’s completely at random?
At CSI Accounting & Payroll, we’ve worked with small business accounting for over 50 years. During that time, we’ve seen a few clients go through random audits, and we’ve also accepted new clients who were going through audits when they contacted us. They wanted to know:
- How do I avoid future audits?
- What should I do if I’m being audited?
Avoiding Business Income Tax Audits
Remember, audits aren’t completely avoidable because some are done at random. However, you can minimize your chance of going through a business income tax audit by following these steps:
- File your tax returns accurately. This just means having correct numbers and categories listed properly; extensions don’t trigger audits.
- Check that your books are accurate and complete every month. These numbers build on each other year-round, so if you just have an employee handle bookkeeping on the side, it may be a better idea to outsource to a professional so mistakes don’t run on.
- Reconcile your bank accounts every month.
- Avoid other red flags. Here are the top 12 audit triggers!
These steps won’t help if you’ve already received a mail notice from the IRS; there’s no avoiding an audit at that point. Last-minute changes made internally may be seen as an attempt to cover up intentional fraud, and any changes will be made by your IRS auditor later on as needed.
Handling Business Income Tax Audits
Your first notice of an audit should come in the form of a paper letter from the IRS. Immediately upon opening the letter, you should follow these steps:
- Send a copy of the IRS letter to your tax professional. If you know that you did something very wrong or illegal, you should also contact a tax attorney.
- Read up on your Audit Techniques Guides (ATGs). The IRS publishes guides for audits of different types of businesses and situations. The auditor will follow this guide, and it’s publicly available information. Find your ATGs here!
- Follow the auditor’s instructions in the IRS letter you received. They will generally want you to gather this information:
- A detailed general ledger of all of your business activity for the current audit year. They may even want the past 3-6 years.
- Bank statements for the current audit year.
- Accounts receivable and accounts payable ledgers.
- A list of your fixed assets.
- Receipts for any categories they want to look further into. An example may be office expenses, since a variety of things can fall into a broad category like this.
- Be prepared to provide additional information. This can include:
- Sales invoices.
- Operating agreements.
- A capital contribution log.
- A stock ledger.
- Loan documents.
- Purchase documents.
- Rally your management team. Audits can take a long time! Make sure your team is ready to help with your regular operations, because you’re going to be spending a bit of time with your auditor (if you’re handling the audit yourself).
- Prepare for questioning, or have your tax professional do it for you. They can represent you with a power of attorney form (IRS Form 2848).
Don’t want to handle an audit on your own? Most small business owners feel the same way.
The good news: Your accountant will likely handle the audit for you, including gathering materials, handling questioning from the auditor, and even launching the appeal process (if applicable).
The bad news: Nearly all accountants will charge extra for this support.
Back to more good news: CSI Accounting & Payroll includes audit representation for no additional fee! Here’s how we can support you in the case of an audit.
Don’t Go Through an Audit Unsupported!
Now that you know how to avoid triggering audits, what to do if you’re being audited, and how a monthly accountant at CSI can support you through an audit for no additional cost, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what an audit is like, including the risk, the number of years the IRS can review, and how much time audits may cost you.
