An IRS audit is a stressful process for any small business proprietor. The notion of the IRS checking out your financial records might be frustrating, but with understanding and preparation, you can deal with the process confidently. This article will describe how to get ready for an IRS audit, what you should anticipate throughout the procedure and how to stay away from common mistakes.
What Happens in an IRS Audit?
An IRS audit examines your bank statements and tax returns to ensure you have supplied accurate data and paid the correct taxes. IRS audits verify which businesses are following tax laws and detect errors which could indicate underreporting of earnings, overstatement of taxes or some other problems.
Though the term audit may make you anxious, most audits are by mail and the IRS is simply searching for documents to support claims you made on your tax return. The process itself can ease a bit of the stress.
Why Might Your Business Get Audited?
The IRS might wish to audit your small business for several reasons. Common reasons include:
- High Income: In case your business reports a considerably greater income than similar businesses in your business, the IRS might red flag you.
- Huge Deductions: An audit might also come from claiming big deductions relative to your income. The IRS might wish to confirm that these deductions are legitimate.
- Reporting Losses: If your business posts losses year after year, the IRS might want to check you are not underreporting earnings.
- Unreported Income: If there's anything wrong with what you report versus what your clients or customers report on their tax forms, the IRS might wish to investigate.
- Random Selection: Audits are sometimes simply random selection. The IRS picks who to audit using computer algorithms - your business may be selected randomly.
How can you Prepare for an IRS Audit?
The preparation part is important to an IRS audit. Here are some essential steps :
Keep Accurate Records
The most essential thing to do before an IRS audit is keep organized records. That includes:
- Receipts: Keep all receipts for business expenses.
- Invoices: Copy all invoices you issue and receive.
- Bank Statements: Keep track of your business bank accounts - such as withdrawals and deposits.
- Tax Returns: Keep copies of your filed tax returns along with supporting documents.
Using quality bookkeeping services will enable you to remain organized and maintain correct records.
Understand What the IRS Will Examine
The IRS generally asks for documents associated with the things on your tax return they're reviewing. Be prepared to provide:
- Income Records: All earnings out of your business - sales receipts, invoices & bank statements is proof of income.
- Expense Documentation: Receipts, bills and statements supporting your business deductions.
- Payroll Records: In case you have employees, bring payroll records i.e. W-2s and 1099s - ready.
Knowing what the IRS may request could enable you to gather the documents required prior to the audit.
Seek Professional Help
The procedure for dealing with an IRS audit is often confusing, particularly in case you've no clue about tax laws and regulations. In such cases, seek professional assistance. Outsourced accounting services can advise you on how you can get ready for the audit and even represent you in case of need.
Working with professionals that offer small business outsourcing accounting services can give you the satisfaction that your financial records are now being handled by individuals that know tax compliance.
Review Your Tax Return
Evaluate your tax return just before the audit starts to ensure you understood all you gave. Look for unusually big deductions or disparities between your income and expenses that the IRS might question.
If you discover discrepancies or mistakes, speak with your accountant or tax expert regarding the very best action. Error correction prior to the audit starts could avoid additional complications.
Respond Soon to IRS Requests
If the IRS contacts you to arrange an audit, respond fast. Disregarding or putting off your response may lead to penalties and interest. Collect the requested documents and mail them to the IRS as quickly as possible.
Be professional and polite when contacting the IRS. Keep records of every correspondence - letters, email messages, and calls.
What to Expect During the Audit?
The audit process can depend upon the audit type and your business model. This is what you should expect:
Mail Audits
Most small business audits are done by mail. The IRS will send you a letter describing what they wish to review and what documentation is required to support those things. You will have to obtain the documents requested and also post them back to the IRS.
Mail audits typically are simple and relatively fast if you provide the appropriate documentation timely.
Office Audits
For many audits, the IRS might require you to enter into an IRS office in your area. In an office audit, an IRS representative will examine your documents and ask you questions regarding your tax return. Bring all relevant documents along with you.
Office audits are more thorough compared to mail audits and might require you to respond to particular questions regarding your business operations and finances.
Field Audits
The most thorough kind of audit consists of an IRS representative coming to your business to perform the review. The agent will review your bank statements, examine your business premises and also could speak to you and your staff.
Field audits may be more time consuming and thorough - so be ready. Seek professional help if you're facing a field audit.
Strategies for a Successful Audit
The stress of an IRS audit may be too much to handle, however these tips will help you get through it:
Be Honest
Honesty is essential during an IRS audit. Give accurate and truthful information and don't attempt to hide or even change records. The IRS is trained to spot such discrepancies and dishonesty could be punishable.
Remain Calm
It's normal to be anxious during an audit, but keep calm. Cooperative and professional behavior might make the audit run more smoothly.
Be Ready to Explain
Prepare to explain unusual or complex items on your tax return. In case you claimed a large deduction or even reported a big loss, be ready to provide a good reason.
Keep Copies of Everything
Create copies of every document you provide the IRS. Recording what you submit helps you monitor the audit and defend yourself in case of conflicts.
How can you Avoid Future Audits?
No strategy can ensure a avoidance of an IRS audit, though you can reduce your chances with these best practices:
- File Accurate Tax Returns: Check your returns before filing. Be sure all income is reported and deductions are legal.
- Keep Organized Records: Keep financial records organized and current throughout the year. This will help you file your tax return and answer IRS questions.
- Be Careful of Deductions: Only claim legitimate business deductions and be ready to create documentation to prove it. Avoid claiming personal expenses as a business deduction.
Final Thoughts
It might be challenging to prepare for an IRS audit, but with the proper strategy you can successfully deal with this process. By keeping correct records, understanding what the IRS will examine and seeking professional help, you can handle the audit confidently. Staying organized and contacting experts who provide outsourcing accounting services for small businesses can really make a difference.
For more professional help, The Fino Partners can assist with accounting and bookkeeping to keep you on track for any financial challenges such as IRS audits.
