How to Survive a Business Tax Audit

As a business owner, you put in hard work year round for your business. Growth, innovation, team building, and a commitment to your customers don’t just spring out of nowhere. They take time, dedication, and a willingness to put everything you have into the success of your business. And nothing threatens the success of your business quite like a business tax audit.

Yes, the dreaded audit. Even for seasoned business owners, an impending business tax audit can stir up plenty of worry and late nights. And for new business owners, your first audit can seem to threaten the very livelihood of your business and its future.

But it doesn’t have to be that way.

After working with tens of thousands of individuals and businesses to help them fight the IRS, we’ve learned more than a thing or two about business tax audits and what they mean for you. That’s why we’re here to pass along some of that knowledge directly to you.

So whether you’ve never been audited, or you find yourself suddenly facing your first, stay right here. We’ll explain exactly what happens in a business tax audit, how to prepare for it, and steps you can take to avoid audits in the future.

What Happens in a Business Tax Audit

First of all, it’s worth mentioning that the chances of the IRS auditing your business are actually quite low, somewhere around 1% to 2% range overall. The chances can be a little higher as your business grows, but overall, it’s still unlikely.

However, the IRS may audit your business if:

  • You provide a lack of detail in your expenses or income
  • You don’t report all your employee salaries
  • Your deductions for meals or entertainment are particularly high
  • Your deductions for your home office are particularly high
  • And plenty more…

The IRS will notify you of your tax audit by mail, not via email or phone (which can actually be signs of a tax scam). They will include your auditor’s contact info and instruct you as to the next steps.

They perform two types of audits: mail and in person. Typically, small businesses may face the former, also known as a “correspondence audit,” where you must simply provide the specific documentation, clarification, or corrections they’ve expressed interest in.

On the other hand, the less-common field audit will occur at your place of business, your tax preparer or accountant’s office, or at an IRS office.

At the end of the audit, one of three outcomes will occur:

  1. The auditor confirms your information is correct. This means they’ve found no errors and you’ve paid the proper amount of taxes.
  2. The auditor uncovers a mistake, which you agree with. This means you acknowledge an error they bring to your attention. This may mean you’re liable for additional taxes, penalties, and interest. Or it may mean you overpaid taxes and the IRS owes you!
  3. The auditor uncovers a mistake, which you don’t agree with. This means the auditor has brought an error to your attention, but you don’t believe this is correct. You can file an appeal with the IRS or even sue them, which will set you into a different sequence of events following the audit.

How to Prepare for Your Audit

It’s important to remember that audits simply represent the IRS taking a closer look at your tax returns to make sure everything is correct. As most audits are triggered by algorithms, the IRS has simply flagged that something may be amiss with your business tax return. It can be as small as a calculation error or as big as off-the-books income. (but it’s usually not.)

You can prepare for your audit by carefully preparing and organizing your tax documents, especially including the ones directly relating to the IRS’s focus. You will likely need to include financial statements such as profit and loss, balance sheet, and anything else related to your bookkeeping.

How to Avoid Business Tax Audits in the Future

IRS audits may be less painful than they seem, but your business is still better off avoiding them altogether. The hours you and your attorney or accountant spend preparing to defend your business tax audit are ours you could spend developing a new product, updating your processes, or helping your employees grow.

But by keeping good records, paying attention to the details, and working with an affordable and reliable bookkeeper and employing a professional tax prep team, you can avoid the dreaded IRS audit and get on to what you do best: Building your business.

Are you facing a business tax audit? Send us a message today via our free live chat and get the audit defense help you need.

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