3 steps to ensure your small business passes an IRS audit

August 29, 2014

Follow these steps to ensure your small business passes an IRS audit.

First, what is an IRS audit? An audit is an accounting procedure in which the IRS examines your financial records to verify that you filed the return in question accurately. If you have your paperwork and receipts (or access to them) and can prove that your initial return was complete and correct, the tax audit will end there.  If the IRS finds errors, either accidental or intentional, you'll have to pay the adjusted amount and any interest penalties. There are few pieces of correspondence as capable of making small business owners fearful as an unexpected letter from the IRS.  But entrepreneurs don’t have to start worrying, as the IRS is generally eager to resolve small business tax issues amicably.  In 2013 only 0.6% of business returns were audited, your chances of an IRS audit are relatively low.

If you’re among that 0.6%, what do you do?  What steps do you take to resolve a tax audit? 1) Understand why your business is being audited.  The IRS is supposed to explain the reason for the correspondence, but make sure you know and understand the reason.  The audit could’ve been triggered by activity on your return (cash wages, high car expenses, excessive meals and entertainment allowances), by your relationship to another taxpayer who is being audited, because your business falls into a category being scrutinized, such as the auditing of all employers who use contract labor or because your EIN was randomly selected for audit.  Also make sure you’re clear on which tax year the notice relates to.  Don’t assume it’s the most recent. 2) Have a conversation with your tax preparer. Contact your accountant or tax advisor that prepared your return, if you did not complete it yourself.  She or he should explain the audit process and help you prepare.  If after this conversation you’re still anxious, or your tax advisor thinks it’s a good idea, hire a professional tax lawyer.  If it's a minor issue and you’re confident of the facts then you can handle the response yourself. 3) Respond within 30 days. Once you’ve gathered your documentation and are confident in how you’re going to handle the audit, it’s time to respond.  Generally you have 30 days to respond to an IRS notice – meaning there’s no excuse for ignoring it.  Plus, a timely response shows that you have nothing to hide.  Send what is requested and only what is requested. Never send originals of your documents, only copies.  And make sure they provide you with copies of the information in their files and of everything you sign. Whether you prepared your small business tax return, had an employee do it, or had it done by a paid preparer, as the business owner, you are ultimately responsible for its contents.  Be sure to review all of your tax returns closely before signing them and mailing them to the IRS. Has your small business ever been audited by the IRS? Leave a comment below sharing the outcome of your audit process.