It’s every business owner’s worst nightmare: finding an IRS audit notice in the mail. If the IRS has sent you an audit notice, you’re probably wondering why. Will you have to pay penalties? How far back will the IRS agent look?
First of all, don’t panic. IRS audits are rarely as frightening as they’re made out to be. If you’ve done nothing wrong and have kept proper documentation, you have very little to worry about. Even if you have done something wrong, an audit won’t necessarily spell disaster; you may simply need to pay more taxes or fees to settle the dispute.
Below, an attorney from Murray Moyer, PLLC explains everything you need to know about IRS audits.
Why Is the IRS Auditing Your Business?
Why does the IRS target certain businesses for an audit? A few reasons include:
- Tax return inconsistencies: If your tax returns deviate significantly from those of other businesses in the same industry, the IRS will probably wonder why.
- Excessive deductions and losses: The IRS commonly audits businesses that take substantial and unwarranted deductions. Businesses that claim losses year after year are also at risk of IRS audits.
- Business ties with other audited entities: When the IRS audits one business, it may also choose to audit other businesses that have ties with the entity.
- High-risk industries: The IRS targets some industries for audits more than others, for example, businesses that largely deal in cash.
- Whistleblower tips: If someone has reported you to the IRS for suspected tax fraud or evasion, the IRS may choose to follow up on the tip.
Some IRS audits are simply random. The IRS chooses a certain number of tax returns to audit each year, and yours may have been one of them.
Not All IRS Audits Are Alike
Not every IRS audit will involve agents coming to your business. The vast majority are conducted via correspondence (mail). For example, the IRS may simply ask you to supply documentation that supports your tax return.
The next step up is an office audit. This audit requires you to visit an IRS office and talk with an agent. They may interview you and ask to see supporting documentation.
A field audit is more in-depth. During a field audit, an IRS agent will come to your business to look over your records.
How To Prepare for Your IRS Audit
Your IRS audit is approaching, and you’re wondering how to prepare. Here’s how to ensure that the audit process goes smoothly.
Understand the Reason for the Audit
Your audit notice will include the reason why the IRS has chosen to audit you. For example, maybe you’re missing documentation or the IRS system has identified discrepancies in your tax return.
Collect Documentation
If the IRS wants documentation, it will tell you what documents you need to provide. That might include bank statements, receipts, invoices, etc. Collect all important documentation and keep it organized. The better organized you are, the faster the IRS audit process will be.
Review Your Taxpayer Rights
As a taxpayer undergoing an audit, you have certain rights during the process. For example, if you don’t like the auditor’s decision, you have the right to file an appeal. You also have the right to privacy, which means that audits must not be more invasive and intrusive than necessary.
Choose Your Representation
While it’s possible to go through an IRS audit by yourself, it’s not recommended. Ideally, you should hire representation from a tax professional before the audit. This could include a tax attorney, an enrolled agent, or a certified public accountant (CPA).
Respond to the IRS Notice
Your audit notice will include a date by which you must respond. Don’t ignore this deadline, as it will cause more trouble for you if you do. The IRS allows you to request an extension if you need more time.
Attend Your Audit Meeting
If you’re having a face-to-face meeting with an IRS agent, arrive on time and answer the agent’s questions politely and professionally. Your representative can attend this meeting with you if you like.
Respond to the Audit Findings
After the audit, the IRS will send you a summary of its findings, as well as information about whether you owe penalties and interest. If you agree, you must pay what the IRS is asking. If you disagree, you can file an appeal.
Contact Us for Assistance With Your IRS Meeting
IRS audits can be stressful, but you’ll feel more confident with a partner like Murray Moyer, PLLC at your side. Contact our firm at (919) 846-6779 for a consultation with a tax attorney.
Written by Justin Moyer on July 10, 2024.