Getting Audited? How to Handle It Like a Pro

Mathematical errors, outlier figures and dubious expense categories are common reasons for tax audits of small and midsize businesses.

The IRS conducts two types of audits, depending on the severity of the issue: correspondence audits and field audits.
Audits should be handled carefully and respectfully, with the involvement of a tax professional.

This article is for small business owners who need to know everything about IRS audits, including how to prevent one and what to do if your business receives an audit notice.

IRS audits are on the decline, reducing your chances of being audited from slim to slimmer. Even if you do get one, though, it doesn’t automatically make you a crook.

“While the chances of an audit are small, these days most tax audits involve small and medium-sized businesses,” said Jeffrey Beebe, CPA at Your Money’s Best Friend.

As stressful and overwhelming as a small business audit may seem, there’s no need to panic if you get one. You do need to take it seriously, but audits often deal with simple data or reporting errors that the IRS suspects may have occurred, said Frank Pohl, shareholder and former attorney at the Gunster law firm. He reminds business owners that not all tax audits end adversely for taxpayers.

What is a business tax audit?
An IRS audit is an examination of an individual’s or organizations’ financial information to make sure that person or organization is reporting all of their accounts in accordance with U.S. tax laws.

IRS audits occur when the IRS identifies errors in a tax return, typically one that was filed within the last three years. The IRS may flag a tax return for many different reasons, but the most common reasons why you may be audited include the following scenarios:

Claiming business losses for multiple years
Reporting unexpected, high income levels
Taking several substantial deductions

Key takeaway: A tax audit can occur when the IRS detects an error on a tax return, typically one that was filed within the past three years.

Small business audits
While public companies are subject to strict auditing standards – the Securities and Exchange Commission (SEC) requires that third-party auditors review their financial statements – most small businesses file their own tax returns as a Schedule C company, or sole proprietorship.

This means more oversight from elsewhere: the Internal Revenue Service.

“The IRS also looks at small businesses that file Schedule C much closer than if that business would file their business tax returns as an S corporation or partnership,” said Peter Greco, founder of CSI Group, an accounting firm. Its main concern is that small businesses aren’t hiding sales or exaggerating expenses, he said.

Key takeaway: The IRS carefully examines tax returns from small businesses, especially sole proprietorships. Victor Owonifari & Co is a multidisciplinary accounting and consulting firm established primarily to provide first class accounting and consultancy services to discerning clients? We are adequately staffed with highly experienced professionals who include chartered accountants and research fellows. Click Here to Get Started Today

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