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How To Survive an IRS Business Audit

IRS Agent Discussing an IRS Business Audit With Taxpayer

If a business has yet to face an Internal Revenue Service audit, the mere possibility can be terrifying. However, an understanding of the process and some tips for preparing can help alleviate some of the fear. Here's what you need to know about an IRS business audit.

What Is an IRS Business Audit?

An IRS audit is an examination by the IRS of an individual's or organization's financial information to make sure that the person or organization is reporting all of their accounts in accordance with U.S. tax laws. This includes verifying taxable income, losses, expenses, and deductions.

When the IRS detects errors in a tax return, this can trigger a business tax audit. The IRS may flag a tax return for many reasons, but some of the most common reasons that warrant an audit include:

  • An inaccurate tax return
  • Late tax payments
  • Mistakes with business tax deductions, such as a business taking many substantial deductions

How to Prepare for an IRS Audit

Here's an overview on how an IRS business audit process works. At first contact, the IRS agent will provide a list of the items that they would like for you to submit. After this "Information Document Request" is provided, you will be given an opportunity to gather the documentation. The letter from the IRS will also state how the information should be submitted. Business audits can be requested by mail, take place in a local IRS office, or in person.

It is very important to do some planning before dealing with an IRS audit, as the process can be extensive. Here are a few tips to help you prepare:

  • Gather all necessary forms: use the "Information Document Request" as a check sheet to make sure that all the necessary documents are available. The items that are normally requested include:
    • Bank statements
    • Tax returns from the prior and subsequent years
    • Business's books or ledgers
    • Receipts or canceled checks for the specific items that the agent wishes to justify
  • Organize your records: It can be quite helpful if receipts or canceled checks are grouped and totaled for each item being questioned. If they are organized in a neat and logical manner, the IRS agent will not have to work as hard to verify the specific items and may look upon your situation more favorably.
  • Record your research: If the tax return was self-prepared, it's a good idea to take a copy of any research that you used to prepare it. If the IRS asks why a certain deduction was taken, you should be able to show where the information was obtained. If an error was made, additional taxes and interest may be due, but if you can show them that it was an honest mistake, IRS agents are sometimes allowed leeway with regard to certain penalties.
  • Parse out unnecessary documents: It is best not to take unnecessary documents to the audit appointment, as they will not assist the agent in completing the audit. If the agent needs additional documents that were not originally requested, they will provide you an opportunity to retrieve and provide that information.
  • Consider hiring a professional: A taxpayer is allowed to have an accountant or other professional represent them or attend the appointment with them. The IRS agent can compel you to appear and speak to them directly, but they cannot deny you representation. A representative may be involved from the beginning of the process, but it's also important to know that if a taxpayer requests time to consult a professional mid-audit, the agent must stop the audit until representation can be retained.

During the Business Audit

Sometimes a company audit can be completed in a few hours, but it also may take more than one appointment. The amount of time required is directly related to the number of items that the IRS is questioning and the size of the business being audited. However, it's also impacted by how well you prepare before the IRS audit and how you conduct yourself during the audit.

Tips for surviving the audit:

  • If an honest error is found while preparing for the audit, it should be presented to the agent upfront. Do not try to hide it or circumvent the truth.
  • Prepare your responses ahead of time. Questions should be answered fully and succinctly, with clarification provided when requested.
  • An effort should be made to be polite and courteous, but flattery is generally frowned upon.
  • Keep a tax professional involved.

After the Audit

After the company audit concludes, the agent will explain the adjustments that are being proposed. At this point, the taxpayer has the option of agreeing or disagreeing with the adjustments.

If you agree with the adjustments:

Additional tax will be due and payment will be requested. However, if you do not have the cash flow to pay immediately, you may request an installment agreement, to be payable over several months. It should be noted that interest and penalties will continue to accrue while there is an unpaid balance on the installment agreement.

If you do not agree with the adjustments:

If the adjustments cannot be agreed upon, you have the option to request a conference with the agent's manager. If a resolution still cannot be reached, you may then request a conference with the Appeals Division. If the issue is still unresolved, you have the option to appear in tax court and have a judge resolve the situation. That means that the IRS agent who conducts the audit is not the final judge of any case. If they are unreasonable or totally uncooperative, the taxpayer has other avenues that can be pursued.

An IRS business audit does not have to be a scary event. A taxpayer need only remain calm, understand the audit process, know their rights, and be prepared. This can include bringing on professionals who can help you handle your tax reporting.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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