Business Tax Audit 101: What to Expect if You Get Notice of an Audit

Notice of an audit from the IRS is the thing of nightmares for business owners. Despite best laid intentions, sometimes they’re inevitable. At least half of the fear of something comes from the unknown, audits are no exception. Tally Services is here to reduce your fear of an audit and help walk your business through the process if you get notification of an upcoming audit.

By now, you should have filed your corporate taxes, or at the very least, filed a business tax extension. Ideally, you’ve done everything in your power to avoid a business tax audit, but for some businesses, a tax audit letter comes anyways. In fact, on average, as many as 1 million small business get audited each year.

Business audits are typically handled in one of two ways. Correspondence audits, handled through the mail, account for the majority of small business audits, especially if the tax liability is not extremely high. In this style of audit, the IRS will give businesses the opportunity to provide receipts and other information to verify how the taxes were filed. If the business is unable to provide the documentation to justify the way the taxes were filed, the IRS will expect businesses to pay the difference. As long as the business provides the documentation to support their tax return or pays the amended tax bill, the audit will be complete.

A field audit is an in-person interview and subsequent review of the business’s taxes, usually at the business’s office. They are typically more involved and time-consuming. An IRS agent will come to your office and will meet with business owners and review documents while on premise.

In either case, the notice of an audit will detail the documents necessary and will let you know if the issues can be remedied through mail correspondence, or if  a field audit, will be required. Before the audit, it’s crucial you review the documents and find the missing documents if they exist. Be prepared to defend your tax statements and show documentation to support your case.

Auditors will typically want to see the following: 

• Bank statements, canceled checks, and receipts.
• Bank records from all of your accounts, both personal and business if there is a risk of commingling.
• Handwritten notes, notebooks, receipts, or petty cash vouchers for any transactions that were handled with cash to show and prove the payments.
• Electronic records of accounts, transactions, and so forth.

The auditor will expect you to be organized and prepared for the visit or correspondence audit. Don’t make the auditors guess, do your best to explain what happened and why your business filed the way it did. Failure to comply with the audit request can be very detrimental to your business. By ignoring the notice, the IRS will very likely make changes to your tax bill as they have proposed. They will send a 90-day notice and eventually begin collecting on the amount owed, sometimes with interest. Your business may also be charged tax penalties and most notably, you’ll lose your right to appeal the changes to your tax bill.  

If your business gets notice of a tax audit, don’t hesitate to contact Tally Services in Fort Collins, Colorado. We’re your local accounting and bookkeeping experts, here to help you plan, prepare for, and ultimately, resolve your business tax audit. We’re on your side and we’ll meet you where you’re at to help resolve the situation and reduce your tax stress. Contact us to get started!