For many business owners, receiving notice of an impending IRS audit can be stressful, to say the least. Documents such as receipts, bills, tickets and employment documents need to be gathered, and if you have to meet with an auditor in person you’ll need to be ready to answer their questions. It is a lot to handle on your own, especially when accuracy is so important.
One of the best tools to take advantage of before and during an IRS audit is an audit attorney or certified public accountant (CPA). These professionals understand the auditing process and can offer invaluable advice and assistance to help you prepare. And with over 20 years of experience providing CPA services in the greater New Orleans area, Estess CPA is the perfect choice for any small- to medium-sized business owner. With our accounting, bookkeeping and tax expertise, we can not only help you weather your current audit, but also keep you out of this situation in the future.
What is an IRS Audit?
An IRS audit is an in-depth assessment of your business’ books—taxable income, expenses, claimed deductions and credits, and more. In general, IRS audits are not common, and they are not an accusation of intentional wrongdoing. Instead, the goal is to ensure that your tax return, including the amount you paid, is accurate and compliant with tax laws and regulations. Some reasons your business may have been selected for an audit include:
- Mistakes or inconsistencies in your tax return such as missing information or unreported income
- Excessive deductions, particularly when compared to the average number of deductions claimed by individuals in similar income brackets
- Improperly claimed credits
- A higher level of income
- Financial involvement with partners, investors or other taxpayers who have been or are also being audited
- Claiming deductions such as a home office, meals, business travel and car-related costs, as these may be abused by taxpayers
- Large cash deposits or other transactions, which may indicate unreported income
- Excessive charitable contributions when compared to your income bracket
- Rounding off dollar amounts, which may lead to suspicion regarding the accuracy of your numbers. Additionally, simply estimating your income rather than reporting it factually may raise red flags with the IRS.
Types of IRS Audits
If your company is chosen for an audit, the IRS will send you a letter containing contact information and instructions regarding next steps. It is here that you will learn which form your audit will take. Depending on the scope of the issue, your auditing process may consist of:
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Mail audits, or correspondence audits
In this situation, the letter you receive from the IRS will likely include requests for information regarding aspects of your tax return such as cash flow, deductions and credits. Make sure your responses here are complete and accurate, as well as submitted by the stated deadline. If the requested information is too extensive or will take too much time to gather, you can request to meet with an auditor in person or ask for an extension by mail or fax.
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Office audits
More intensive than a mail audit, but less involved than a field audit, office audits require you to meet with an auditor in person. Supporting documents will need to be brought to the meeting, and auditors may ask both general questions about your business as well as pointed queries regarding the issue at hand. If any new potential issues are identified, the scope of the audit could expand.
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Field audits
IRS revenue agents may visit your home, business, or the office of your attorney or CPA in order to examine your books and records. During this process, the agent or agents may interview both you and your employees.
How to Prepare for an Audit
The best way to prepare for an IRS audit as a business owner is to begin well in advance. Ensuring that you keep detailed and accurate records, as well as a log justifying deductions such as business expenses, can make it easier to plan for and respond to audits. These records should go back a few years, as the IRS can, in most cases, include up to the last three years’ worth of tax returns in an audit. And if they find additional issues during the auditing process, they may go back even further.
Some other things to take care of when preparing for an IRS audit include:
1.Understanding the purpose and scope of the audit
Take the time to determine what kind of audit the IRS will be conducting, as well as what potential issues they have identified, in order to plan out your next steps.
2. Acquiring the services of an attorney or CPA
While you may be able to handle an audit—particularly a correspondence audit—on your own, that doesn’t mean you should. Audits can be complicated, and providing incomplete or inaccurate records or information may only serve to expand the scope of the audit. An attorney or CPA can help to gather the necessary records, offer interview-related guidance and provide IRS audit representation during in-person meetings.
3. Gathering any and all necessary information
This may include bank statements; financial records; proof of business expenses, such as travel logs or tickets; medical and dental records; loan agreements and associated details; and more.
4. Replying to the letter on time
The IRS gives you a grace period with which to gather information and respond to their letter, but you won’t have forever to do so. Ignoring the letter, or failing to request an extension if one is needed, may lead to the IRS completing your audit and sending you their proposed changes without giving you a chance to defend yourself.
What Happens After an Audit?
Once the audit is completed, one of three things may happen:
- No further action will be taken if you can prove, to the satisfaction of the IRS, that no mistakes have been made on your part.
- You officially state your agreement to IRS-proposed changes, which may include making payments or submitting an action plan for business adjustments.
- Your understanding of, and disagreement with, the proposed changes is officially noted. In this case, you may choose to request a meeting with an IRS manager, take part in IRS-provided mediation or file an appeal.
Get the Financial Assistance You Need with Estess CPA
IRS audits are often dreaded by businesses of all shapes and sizes, but allowing yourself to stress and respond in haste may only make it worse. Instead, consider keeping detailed records, taking the time to carefully read and respond to the IRS’ notice, and engaging the services of an attorney or CPA. By doing so, you can make the process that much smoother.
When it comes to finding the right CPA for your situation, there is no better company to turn to than Estess CPA. With decades of experience providing services including accounting, bookkeeping and business advice, we know just what to do to protect your financial interests and provide you with peace of mind. So if you need help preparing for an IRS audit, or if you would like to take advantage of our other financial tools and services, take the time to get in touch with us today.
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