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What You Should Know about Business Tax Audits Conducted by the IRS

1. Most of these audits are conducted in person by the IRS.

2.
These audits are very comprehensive and cover issues such as income tax, employment tax, and payroll tax. Proper preparation is crucial for the audit.

3.
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 in order to verify the authenticity of the information that you have filed. Questions such as whether you included all of your income and filed only for deductions that are permitted by the law are looking into. These audits aren’t conducted at random. Returns likely to have some errors in them are selected by the IRS through a set 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

1. By mail: This type of audit is known as a correspondence audit.

2. At an IRS Office: This type of audit is known as a desk or office audit.

3. In person: This audit is conducted at the site of your business or your home and is known as a field audit.

As mentioned above, the majority of business audits are conducted in person, i.e. they are mostly field audits. Field auditing is an extensive task and considered a physical inspection of all aspects regarding owners and their businesses. The IRS takes a close look at the accounting system and business records while physical inspections are carried out to deem the authenticity of those records. It can take up to a year for a business audit to be completed (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 raised by the audit team.  

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. You should be accurate and precise when providing the information requested by the IRS. It is recommended to have a licensed tax professional to handle your audit-related tasks. You will need to 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, which are 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’ 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 included in the audit letter you received via mail.

Field and Office Audits: These can be more complex. In this, you will need to:
  1. Prepare for the meeting session you will have with the IRS agent/officer who will be conducting the audit
  2. Prepare and compile the information that has already been requested by the IRS
  3. Prepare for any sort of questions that the IRS and the IRS Agent/Officer might ask

In simpler words, you must be prepared to answer any sort of question related to your financial activity that has happened 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 for reconstructing such documents.

Respond to any request for documents/information promptly and on time

  • The IRS will increase the number of questions if they think it is necessary for you to change your returns. If you get an IDR (Information Document Requests) which asks for more information about finances, it is important to respond by the deadline in order to avoid any sort of suspicion on the IRS’ side.
  • The IRS may tell you that items such as income and deductions have been misreported. If you disagree with their conclusion, you must represent your interpretation to the IRS.
  • Finally, the audit is closed with the IRS either recommending some adjustments to your returns or accepting your returns as they are. You would, however, be given a 30-day window to appeal their decision.

Check out America's Best Bookkeepers

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.




 

Concept image for filing federal income taxes online and being audited. Computer keyboard, calculator and pen are placed on income tax form 1040. The 'word' AUDIT is stamped on the form 1040.

What Exactly is Cloud Hosting?

Essentially, cloud hosting is a service providing the host; the host provides the users with virtual servers for extracting and storing data which is then connected to a vast and complex network of physical web servers provided at the back end.

Usually, the clients could use the cloud hosting services for as many times as they want depending on their usage and requirements. Cloud hosting is an ultimate solution for cost-effective storage of data without using up a lot of physical storage disks on your end. Furthermore, the client is not required to pay for the extra capacity and pays only for the storage being used by them. 

What is an IRS Audit?

An IRS Audit is essentially a detailed review of an organization or a person’s accounts and the information pertaining to the financials. The audit checks that all information is reported correctly, all tax laws are being followed, and the company or individual is paying their taxes as required and, hence, verifying all the amounts paid as tax to be correct.

The Three Basic Types of IRS Audits

If you or your organization has been earning millions, there is a one-sixth chance that you might be selected for an IRS audit. If you are earning an average pay, your chances are even. An IRS audit is random and is a detailed analysis of your finances to make sure that all money is earned from lawful sources and that all taxes are being paid according to the law.

Usually, an IRS audit is triggered if the IRS notices unlawful activity that is related to your revenues or earnings. It could also be performed because the IRS notices that the taxes required to be paid are not being paid. An example of such activity is a sudden massive drop in your revenues or earnings that might point towards the fact that you are trying to hide money to avoid taxes. It is a very detailed auditing process in which details of your finances are combed through so that any discrepancies could be caught. The three basic types of IRS audits are explained below.

Correspondence Audits

These audits are the simplest audits of them all. Correspondence audits usually take place when you have a slight mistake in your tax returns which could be a human error based on typing in the correct amount.

Office Audits

An office audit is a bit more complicated and scary. During this audit, you are asked to go to an IRS office with all the correct paperwork that is required of you. This audit might be triggered if you have increased and high tax deductions – such as a medical expense.

Field Audits

A field audit, on the other hand, is similar to that of an office audit but the IRS approaches you. In such cases representatives from the IRS visit you at your home or workplace and request to look at certain paperwork and records of your business dealings.

In the case that you are being audited, you would be notified properly by the IRS via a call or letter. The letter or call would further let you in on the details of the required documents and paperwork that might help them assess your earning patterns and your tax paying patterns.

What Documents are usually required by the IRS?

When selected for an audit, the IRS notifies and informs you about all of the documents they might need to conduct your audit. However, some of the documents may include:

  • All documents that are of material in the administration of the internal revenue law
  • Records regarding revenues, taxes, earnings, expenses, and purchases for at least the three previous years
  • Complete employment records for the past four years at least

Documents required to meet IRS Standards in Cloud Hosting

Electronic times have made things faster and more accessible. Hence, it is important that you create digital copies of all related paperwork and store it in your cloud hosting services. When facing an IRS audit, not only are these documents readily available, they save both of parties a lot of time and effort, making the complete audit process more easy and quick.

According to the IRS website, the documents stored electronically which are acceptable for the audit should be prepared as following:

“The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. “

In essence, all of these documents must be complete, accessible, and accurate while serving their purpose of proving all the possible transactions and details that are required and asked by the IRS Audit.

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.