There’s little that’s more ominous to your small business than an IRS audit. The contact is unavoidable, but it doesn’t have to put you in a panic. Audits are often random, and, if you’ve been honest on your filings and kept good books, the process should pass with relative ease at the hands of a trusted tax advocate.
Receiving notice of one is shocking, and you might be feeling indignant at the idea of being selected, but an IRS audit does not have to be a traumatic experience.
What is an IRS Tax Audit?
An IRS tax audit is a formal federal examination of an organization’s or individual’s accounting and financial information to ensure that filings are being made correctly per tax law and to verify that the reported amount of tax is correct.
There are two main types of audits, correspondence audits and field audits:
- Correspondence audits usually focus on a single item or form and occur solely through the mail.
- Field audits are where an agent is directly assigned to you and can come to your place of business. These audits are a much more comprehensive process where the IRS goes through every line item one by one.
Negligence in dealing with either of these types of audits can lead the IRS to assess you additional tax, interest, and penalties that you might not actually owe. Fixing these issues after an audit is closed can be costly and time-consuming. You’ll want to avoid this at all costs.
And, after years of low examination rates, the IRS has announced its intention to increase small business audits by 50% in 2021. This means that the IRS plans on auditing 1.115 million small businesses in the coming year (based on data released by the IRS for FY 2019).
So what constitutes a small business in the eyes of the IRS?
- Small to medium businesses and their owners (making between $100,000 and $5,000,000 in yearly revenue)
- 1099s, independent contractors
- Individuals who have small S-corps or C-corps
- Self-employed individuals
- Start-ups that receive considerable funding
But the news is not all bad. While the list of small business auditees is broad, the expectations and processes of an IRS audit, and what a tax relief expert can do to assist you in the event of one, are very specific.
Why Am I Being Audited by the IRS?
The short answer is that it’s impossible to say for sure — IRS audits are often random and the algorithms that trigger them are unknown. There is, however, enough information out there for us to speculate on some of the causes:
- Hand-filing your return
- Posting losses for three or more consecutive years
- Unusually large gains from year to year
- Not reporting corporate employee salaries
- High meal and entertainment deductions
- High home office deductions
- Claiming your vehicle as 100% business use
We also know that the IRS sometimes runs specific, targeted “operations'' where they’ll take a look at certain industries—like nail salons, construction businesses, or restaurants. Cash-based businesses are likely to trigger audits more frequently, as well as subscription-based businesses like software companies.
Keep in mind that with an audit, the IRS is just trying to collect the money that is owed to them. When an agent comes to your place of business, it isn’t a mark of ill-intent towards you or your company, it’s a routine or randomized check to ensure compliance is being met on both ends.
What to Expect if You Receive Notice of an IRS Audit
When your business has been selected for an audit, the IRS will send a notice by mail to signal that an audit has been issued and ask for you to contact them. They will then follow with a preliminary document request. You will be expected to turn over these documents for review.
And, while we always urge compliance as an auditee, this is where we advise individuals to reach out to a tax audit expert for help.
Outside of speaking the legalese of tax compliance, your tax professional can take over your correspondence, help you to understand any issues with your returns, and ensure compliance on behalf of the IRS. This person will also fight to uphold your rights as an auditee — pushing back when necessary to get you the best audit outcome possible, and to control the flow of information that is given to the IRS.
As a small business owner, there’s a chance you might not know the full extent of your rights in the face of the IRS, and this is OK. That’s why there are tax experts — to assist you with an audit, and to keep you doing what you do best.
What's at Risk for My Small Business in the Event of an IRS Audit?
Once you receive notice of an IRS audit, there is a lot at risk if you're non-compliant. Be aware that if you don’t respond, or claim to have not received their correspondence — even if it’s the truth —, the IRS will continue to audit your business based upon the information available to them.
If you’ve made mistakes on your filings or have been intentionally dishonest, you’ll be assessed fines and penalties, the severity of which will depend on the circumstances of your situation.
Penalties and interest can and will become a compounding issue. If you owe a penalty, you’ll technically owe it as soon as it’s assessed — including interest and penalties already accrued. This can have long-lasting effects on your business’s finances and severely affect your payroll, which is likely your greatest expense. Hence, compliance is the best way forward.
Should I Hire a Tax Expert for Help with an IRS Audit?
You might be thinking, “If I’m going to end up owing money to the IRS anyway, why should I spend the money on hiring a tax professional when I could allocate these funds to the IRS?”
The answer is simple: outside of being able to check the flow of information, take over your correspondence, and keep you in front of your customers at work, a tax advocate can battle on your behalf to resolve with the IRS if a resolution is needed.
Your advocate can make an offer-in-compromise, table a payment plan, request penalty abatement, or negotiate a settlement. Either way, it’s their job to reduce the amount you owe to the IRS.
- Offer-in-compromise: an agreement between the auditee and the IRS that settles an individual’s liabilities for less than the full amount owed.
- Table a payment plan: an agreement to pay your balance due within a specified amount of time, often in favor of the auditee.
- Request a penalty abatement: based upon the outcome of the audit, or the state of your business, your tax advocate can argue for the IRS to waive some of your penalties.
- Negotiate a settlement: your tax relief expert can negotiate a non-above settlement that works to your benefit and placates the IRS.
When you defend yourself, you run the risk of being overwhelmed by tax jargon and losing your way against the IRS when fighting for your deductions, which could lead to the opening of a floodgate that allows the IRS to look into issues they might not have been looking at before. You do NOT want this to happen.
What You Can Do to Protect Your Small Business from an IRS Audit
There’s no way to prevent an audit, but there are many ways to keep yourself organized for compliance if one comes.
The IRS wants to know that you’re taking care of your finances and that you’re taking the time to stay organized and understand your income and expenses. Don’t expect an audit every year, but be prepared and work as though one is coming at some point in the lifetime of your business.
Make bookkeeping a priority for your small business. Keep an exhaustive list of your records and store this information in an online drive. Scan all receipts, credit card statements, invoices — anything that shows money is being made or spent. When called upon, you should be able to provide documentation for your previous three years of business, though we suggest keeping up to six on file. Remember, the cleaner and more organized your books are, the shorter the duration of the audit and the smoother it will be.
If keeping your books seems overwhelming, you can outsource the job to a professional. A commitment to organized transacting is an investment in your business.
How to Contact Tax Relief USA in the Event of an Audit
Once the dust settles and you’re no longer feeling irate, contact a tax professional at Tax Relief USA for help. A 30-minute phone call can be the difference in your fight against the IRS.
Tax Relief USA has helped many individuals and businesses get out of tax trouble by working directly with the IRS to successfully present cases of financial hardship, reach settlement agreements, or prove that the IRS is in the wrong.
With our expertise we can ensure you’re not only paying your fair share—we’ll do whatever we can to get you into the most advantageous tax position.
If you’ve received a notice of an audit from the IRS, exercise your rights as an auditee and get tax help from Tax Relief USA today.
Learn more about how Tax Relief USA can help you resolve your issues with the IRS, including federal tax liens, back taxes, and more. Give us a call at (408) 533-1814 or answer a few questions here to get tax help now.