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What an IRS Audit Is Like: Risk, Process, and Cost

January 17th, 2024 | 7 min. read

By Bryan Cremeen

No matter how good of a business owner you are, you still worry about being audited by the IRS – and we definitely don’t blame you!

With the fear of an audit, you’re also going to have some questions.

At CSI Accounting & Payroll, we’ve worked with small businesses for over 50 years – including many that have gone through audits at no fault of their owners. The owners often ask us:

  • What is the risk of an IRS audit?
  • How many years back can the IRS audit you?
  • What is the cost of being audited by the IRS?

Blog - What an IRS Audit Is Like Risk, Process, and Cost

The Risk of an IRS Audit

As we mention in this article about how an accountant can help with audits, there are two types of tax audits: sales tax audits and income tax audits. We’ll address the different audit methods (mail, office, and field) later on.

Sales Tax Audits

Sales tax audits can be completely random, and most are! The State has a goal of auditing every business in the state every three years for sales tax.

You won’t trigger a sales tax audit unless you’re not paying your sales tax or are doing something completely wrong.

Ultimately, sales tax audits are relatively common, and they will usually fall on your shoulders if you’re doing your own sales tax.

Income Tax Audits

You can also be chosen at random for an income tax audit. 

There may also be mismatched information between your return and third-party sources. Typically, this means underreporting income. If this happens, an audit is pretty much guaranteed.

Worried about other triggers? Here are the top 12 red flags for income tax audits.

Luckily, income tax audits are rare. Plus, if you’ve been working with CSI Accounting & Payroll, an income tax audit won’t fall on your shoulders.

How Far Back the IRS Can Audit You

How far back can you be audited? The IRS does whatever it deems necessary.

Number of Years

Generally, the IRS will audit the past three years of your books, but they can go back six years if they find substantial errors. If they find intentional fraud, there’s no limit to how far back they can audit.

Reasons to Wonder

Lots of small business owners wonder how far back the IRS can audit them. This is usually for a few reasons, such as: 

  • Wondering how long the audit will take
  • Worrying about finding all of the required paperwork
  • Having concerns about their books from a certain time period

If you’re worried about your books in the past, that’s an indication of a larger problem. Why? Because numbers build off of each other in accounting. 

You can’t just snap your fingers and “fix” your books in a certain month; you have to go back and rebuild all of your months starting when things went wrong. 

If you’re worried about your books at any point in time, it’s a good idea to work with a service that goes back and checks the work. (In the industry, this is called back work, or back taxes.) 

CSI does this as part of our onboarding process to guarantee audit-proofed books.

The Cost of an IRS Audit

Audits should only cost you money if you need to hire a lawyer because you deliberately committed fraud. In that case, the cost will fully depend on your lawyer.

In other cases, audits can cost you a lot of value due to lost time. (Think about how much your time is worth to your business!) Let’s examine the different audit methods to see how long they generally take.

Mail Audits

Audits done by mail are typically the least time-consuming. This audit method can take anywhere from a couple of hours to a week of gathering and sending documentation to the IRS.

They’re generally done when the IRS has a discrepancy between what was reported to them by outside parties and what was reported on your tax return. 

Examples of this include 1099s showing more than the revenue on your business tax return, or payroll being different between Form W-2 and your tax return.

Office Audits

The next level of audit is when you have to go to the IRS office. You have to bring the documentation they request and speak with an IRS agent. They will also have you gather, copy, and tag documents for the agent.

This type of audit usually takes between a couple of hours and an entire day at the IRS office.

Field Audits

This is definitely the most time-consuming. Field audits tend to be more detailed than mail or office audits, and the auditors tend to dig deeper into the records.

An IRS agent will come to your business or your accountant’s office (if your accountant is assisting you with the audit) and spend anywhere from one day to one week on site.

The agent will interview, review, and perform discovery on your business. You will also need to gather all the documents they request and be available to get any additional documents they want.  

Never Handle an Audit Again

Concerns about audits are normal, but now that you know about the risk, the number of years the IRS can review, and how much time audits may cost you, are you ready to check out monthly accounting services and have audits taken off your shoulders in the future?

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:

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Not ready to talk? That’s okay! First, learn more about the cost of monthly accounting by clicking the image below:

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Bryan Cremeen

Bryan joined CSI Accounting in 2019. He joined the team after CSI purchased his accounting firm, AccountSource LLC, which he had owned since 2005. He graduated from St. Cloud State in 2001 with a Bachelor's Degree in Accounting and has been an Enrolled Agent since 2010. Before owning his own accounting practice, Bryan had worked at the State of MN handling financial reporting and had been in private industry as a Controller. His primary responsibilities include overseeing the accounting department and making sure clients are receiving quality service. Fun Fact: Bryan has played soccer since the age of 4. He still plays soccer year round through various adult leagues and is an avid supporter of the Minnesota United MLS soccer team. COYL!!! (Come on, you Loons!!!)