Yes, the word strikes fear in every taxpayer's heart. Here are the basics.
You may know someone who's been through an IRS audit. You've at least heard that it can be a grueling, complex process. But how much do you really know about this potentially-unpleasant procedure? Here's some of what every business owner should know.
What is an IRS audit?
In an audit, the IRS examines your company's accounts and financial information. The agency's intent is to make sure that your return is in accordance with tax laws and that you paid the correct amount of tax.
How are businesses selected for audits?
If that notice comes in the mail (the IRS does not send audit notification through email, so don't give out personal information online to someone who purports to be a representative) or you get a phone call in addition, don't assume that the IRS believes you've made an error of some kind. Audit subjects are selected in one of three ways:
Random selection/computer screening
Document-matching (W-2s or 1099s, for example, don't match information claimed on the return), or
Involvement of related returns (if one of your business partners, investors, etc. is audited, you may become a part of that audit).
How are audits conducted?
Audits occur through the mail or in person. If it's the latter, you may meet in your home, at your office, at an IRS office or at your accountant's location.
Are changes always requested?
No. Sometimes your return will be approved as filed. If you are asked to make changes, you'll get a thorough explanation.
How long does an audit take?
It depends on several factors, including the audit type, your ability to produce the requested documents, the level of complexity, the ease of scheduling meetings with all involved and your reaction to the audit's results.
What records will I be asked to produce?
You'll get this information in writing. Electronic records may be acceptable, but check with your auditor to make sure they're in an acceptable format. Remember that you should be keeping copies of all tax-related documents for at last three years after you file a return.
What rights do I have in an audit?
Many. They include the right to:
Be treated courteously and with respect by IRS representatives
Receive explanations of the rationale for requesting information, how it will be used and what the ramifications of not providing it are
Privacy and confidentiality
Represent yourself or appoint an authorized representative, and
Appeal findings that you don't think are warranted, either through the IRS itself or the court system.
Can I do anything to avoid an audit?
Not if you're simply selected randomly or you're involved with an entity that is audited. But we can help you throughout the year as you manage tax-related accounting tasks. We'll prepare relevant reports, be involved in business decisions that can have impact on your current return and help you keep an eye out for every possible legitimate deduction.
We don't want you to obsess about the possibility of an IRS audit, but we do want to contribute to the peace of mind that can come through year-round awareness of your income tax obligation.