What You Should Know about Business Tax Audits Conducted by the IRS
- Most of these audits are conducted in person by the IRS.
- These audits are comprehensive and cover income tax, employment tax, and payroll tax. Proper preparation is crucial for the audit.
- The determination of the IRS agent is not final. You have the right to appeal against their determination.
The audit of your business tax return is conducted to verify the authenticity of the information you have filed. Questions such as whether you included all of your income and filed only for deductions permitted by the law are looking into. These audits aren’t conducted at random. Returns are likely to have the IRS select some errors through intricate criteria. The audits begin within a year of filling and are completed mostly within that year.
The Returns of Audits are Conducted in 3 Ways
- By mail: This type of audit is known as a correspondence audit.
- At an IRS Office: This type of audit is a desk or office audit.
- In-person: This audit is conducted at the site of your business or home and is known as a field audit.
As mentioned above, most business audits are conducted in person, i.e., they are mostly field audits. Field auditing is an extensive task and is considered a physical inspection of all aspects regarding owners and their businesses. The IRS looks closely at the accounting system and business records, while physical inspections are carried out to determine the authenticity of those records. A business audit can take up to a year to complete (in most cases). However, the audit time can be reduced if a business properly prepares for the audit with prompt responses to the requests and questions the audit team raises.
While the audit is being conducted, the IRS requires you to submit all necessary documents (such as bookkeeping records) that are used to determine your financial position. It would help if you were accurate and precise when providing the information the IRS requests. It is recommended to have a licensed tax professional to handle your audit-related tasks. You must provide your tax professional with the facts needed to handle the audit.
Understanding the Scope of an Audit
The scope varies according to the type of audit being conducted. Here’s what you should keep in mind:
- Mail audits are very limited. They include a check on a few items mentioned in the audit letter that the IRS mails you.
- Office audits go into more detail. They are generally less complex than field audits, but in certain situations, they may have a scope similar to that of a field audit.
- Field audits are the most time-consuming. They include questions that probe into the activities of your business and your business’s financial position. It is a wise decision to hire the services of a tax professional to represent your business in front of the IRS.
Preparing Responses to Questions Asked by the IRS
Mail Audit: Preparing for a mail audit is a relatively easy task. You will only have to prepare complete responses to the questions in the audit letter you received via mail.
Field and Office Audits: These can be more complex. In this, you will need to:
- Prepare for the meeting session you will have with the IRS agent or officer who will be conducting the audit.
- Prepare and compile the information that the IRS has already requested.
- Prepare for any sort of questions that the IRS and the IRS agent or officer might ask.
In simpler words, you must be prepared to answer any question related to your financial activity during the year for which you are being audited. You will also need to recreate documentation for anything that isn’t documented (or if relevant documents have been misplaced). Third-party records or other records must be used to reconstruct such documents.
Respond to any request for documents and information promptly and on time.
- The IRS will increase the number of questions if they think you must change your returns. Suppose you get an IDR (Information Document Request) asking for more financial information. In that case, it is important to respond by the deadline to avoid any suspicion on the IRS side.
- The IRS may tell you that income and deductions have been misreported. If you disagree with their conclusion, you must present your interpretation to the IRS.
- Finally, the audit is closed, with the IRS either recommending adjustments to your returns or accepting them as they are. You would, however, be given a 30-day window to appeal their decision.
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