The IRS audit–it’s not a joke, even though many jokes have been made about audits and auditors. An IRS audit is simply a review or examination of an organization’s financial information to verify that the information is recorded correctly, and the reported amount of tax is correct. It is nothing to be feared, but it is to be respected and carefully prepared for by incorporating sound business practices, accurate financial record keeping and reporting.
What is Important to Know?
IRS audits are:
- Not random. The IRS selects returns that are most likely to have errors, based on their complex criteria and past tax return information.
- Only 0.51% of taxpayers were audited in 2018.
- IRS audits are accomplished in three ways:
- By mail (the largest share of audits.)
- At an IRS office—an “office or desk audit.”
- In person, at your business office.
- The IRS agent’s determination is not final. You have the right to appeal.
- During an audit, you will be asked to provide information and documents that support your tax return. It is important to supply that information as requested.
What is Happening with IRS Audits?
- As noted, most audits (about 75%) are performed by mail, resulting in minor, if any corrections.
- An increasing proportion of individual tax audits are due to individuals claiming the Earned Income Tax Credit.
- A remarkable number of people do not respond to an audit.
- The most common IRS notice (occurring three times more often than an audit) is a notice of under-reporting, proposing additional tax payments and possible penalties.
- If serious errors are found (or suspected) in a company’s tax information, a field audit will occur, and substantial payments can result. The average payment in 2018 was $85,400, according to the IRS.
- Businesses formed as an S corp or partnership are less likely to be audited.
Why Would the IRS Select My Business for an Audit?
Consider these situations and change them to avoid an audit:
- Filing and paying taxes late every year.
- Paying unreasonably large salaries to employees to also are owners or shareholders.
- Paying large reimbursed business expenses.
- Making excessive charitable contributions.
- Claiming 100% business use of a company vehicle.
- Claiming excessive deductions for meals or entertainment.
How to Address an IRS Audit
- Start well in advance with well-advised and well-organized processing of all income and expenses, careful record keeping and accurate financial processing.
- Understand the scope, terms and timing of a requested audit.
- Carefully prepare your responses to the IRS Questions.
- Respond to all IRS requests for information and documents on time and in the manner requested.
Seek Professional Accounting and Business Audit Assistance
Contact Estess CPAs, serving the greater New Orleans area. Estess CPAs specializes in helping small and medium-sized businesses with accounting, payroll, bookkeeping and taxes. We can help you stay organized, with customized services to meet your needs, including auditing and IRS representation.