If your business has been selected for a tax audit, you likely have many questions and concerns. To be frank, IRS audits aren't typically random — and take into account a myriad of complex factors to determine which businesses receive an audit. Some industries, for instance, are more likely to be under the watchful eye of the Internal Revenue Service. However, there are also many "triggers" that can lead to an audit as well.
Some of these common red flags include:
- Failing to report all of your income accurately
- Failing to comply with regulated employment taxes
- Underreporting sales
- Deducting personal expenses as business expenses
- Claiming losses every year (never showing profit)
Regardless, if you're facing an IRS audit, you should stay informed. Yes, having a business lawyer by your side can help — but it's not always that simple. Let's start with some of the basics and then answer some common questions surrounding these audits.
IRS Audits 101
When an IRS takes a look at your business tax returns, they're trying to determine whether or not your business included all income — and only deductions and credits set out by law.
Once you have completed and filed a business tax return, the IRS has a three-year period to complete an audit. Usually, they'll begin and finish the process within a year of your filed return — however, there are certain cases where it may take longer. The audit will most likely be conducted in-person, although it could also come by mail or be held at an IRS office.
Frequently Asked Questions About IRS Audits
Who Does the IRS Target?
The IRS highlights certain businesses more than others, sometimes shifting gears year by year. With that being said, there are certain patterns we can identify. Here are some of the more common targets for IRS tax audits.
- Small business taxpayers
- High-income taxpayers
- Taxpayers with refundable credits
- Crypto-currency holders
What are the Chances My Business Will Be Audited?
While we wouldn't recommend leaving it up to chance, we do have some data to showcase the likelihood of receiving an audit. According to studies from 2018, 1 out of 459 small business S corps were audited. Regardless, we'd recommend taking advantage of robust tax and accounting software to ensure that your business financials are in order.
Should I Be Afraid of an IRS Audit?
A business audit from the IRS can be a frightening experience. However, most of the time, these audits will come in the mail and simply require a written response that proves discrepancies on your tax return.
Taking advantage of reliable accounting software can mitigate many of these oversights or errors. If you are worried, speak with a tax professional about what your next steps should be. If you happen to be called in for an in-person audit or a member of the IRS visits you in the field — a more comprehensive look into your business may occur. Keep in mind, certain types of businesses will face a higher chance of being looked at. It's one of the many reasons why certain business owners choose to incorporate their businesses as such, because tax rates can vary drastically between S-Corps, C-Corps, and LLCs.
Will I Need to Pay the Audit Tax Due Notice Right Away?
No, not necessarily. You have the option to obtain a payment plan later on — or you can request any collection alternatives once the tax has been assessed fully. While you won't have to pay right away, you will eventually need to.
How Far Back Do Audits From the IRS Reach?
As a general rule of thumb, the IRS is only able to look at an additional three years of taxes after the due date of your most recent return (or when it was filed).
Can I Ignore a Business Audit?
There's no putting off an IRS audit. Whether you like it or not, they will go ahead with their assessment, taking into account any additional taxes, penalties, or interest you owe and enforce payment. Procrastination is one thing, but there's no hiding from the IRS. The faster you take care of any additional payments you owe, the better.
What Happens If I've Missed the Deadline For a Mail Audit?
As you can imagine, missing deadlines is a common issue the IRS faces each and every day. However, you can simply submit a request that the IRS reconsider the audit assessment. You can complete this by contacting the IRS directly before sending the request. You may also want to contact the IRS to ensure that you are the correct recipient. Ask them to check the IRS Correspondence Examination Unit location.
What's the Best Way to Respond to a Mail Audit?
The preferred response method is by fax, especially if you are inching close to the 30-day deadline. Make sure that you are numbering your pages and follow up two weeks after it has been sent through. You'll want to be sure that the IRS has indeed gotten your response.
Will I Know If the IRS Has Completed the Audit?
Yes, the IRS will take a look at the taxes, and you'll receive an IRS notice containing a series of numbers and letters. Depending on the content of this notice, certain actions may be necessary to move forward. You may have to pay additional taxes, you could receive a return, or another result may be in order.
Can I Contest Any Audit Penalties?
An auditor will propose any penalties and you essentially have two options:
- Pay the penalties and move forward
- Provide sufficient evidence that you made an attempt to report the contested items on your tax return.
While certain taxpayers may have sufficient evidence on hand, it can be more difficult in more complex cases. In order to successfully contest an IRS audit, you'll need to demonstrate that the IRS made factual errors and incorrectly applied tax law. Sometimes, the IRS knows they'll lose in court, so they settle based on what's called "hazards of litigation."
However, after a penalty has been assessed, it's extremely difficult to have it removed and requires a subsequent audit reconsideration.
If you're facing a business tax audit from the IRS, don't freak out just yet. Thousands of businesses are audited every year, and many make it through without a hiccup (or, at the very least, minimal penalties). However, the best approach is a proactive one. Make sure to take tax season seriously and go out of your way to report accurately. Don't use your business capital for personal expenses, as that's one of the easiest ways to run into issues with the IRS.
Include tax considerations as a part of your business plan; that way, you'll have a better understanding of overall expenses and profitability for other ventures. Understanding what you owe or may receive back during tax season can help free up cash flow for other operational needs or even debt financing opportunities for growth.