For small business owners, the prospect of an audit can be shocking and scary. They come to us with all sorts of questions: how far back can the IRS audit a small business? How long does an IRS audit take? What is their personal liability in all of this? While there is no substitute for meeting with an actual qualified tax attorney, our team put together this page of basic information to help you understand the nature of a small business audit.
Our clients often wonder whether or not there’s any truth to the idea that there are certain small business IRS audit triggers. Do you know what percentage of small businesses get audited? Believe it or not, only about 2.5% of small business owners will be audited — so it can feel like there’s a bullseye on your back if you’ve been selected.
It’s important to understand that there are certain flags, or triggers, that can make you a more likely candidate for being audited. For example:
Let’s start by first understanding what an IRS audit is, in its most basic terms. When you’re audited for a given business year, the IRS will compare your tax return to your actual books to see if there are any discrepancies. But that’s not all: they’ll also dig through bank statements, receipts, transaction histories, invoices, and more. Yes, being audited by the IRS and having no receipts is not a valid or effective defense or excuse for your sloppy bookkeeping. The IRS is powerful and meticulous during an audit, leading to the frightening reputation associated with this process.
It goes without saying that, should the auditor uncover discrepancies, you’ll be on the hook for unpaid taxes, penalties and interest. Of course, there are avenues through which you can dispute these findings, but you’ll likely want to enlist the help of an experienced tax attorney before taking on the IRS.
Note that most small business IRS audits occur within a 2 to 6 year window of the tax return in question. That’s not a hard and fast rule, but it does generally sum up the time period with which small business audits occur.
If you’ve received notice through the mail that your small business is going to be audited by the IRS, there are some things that you should and must do to prepare.
First, you should strongly consider enlisting the help of a tax attorney during this process, particularly if you know that you have been bad about filing on time and accurately. You should also become extremely familiar with the tax return that’s being audited, down to the last detail. Go through all your records and find every little scrap of evidence you can to substantiate the numbers reported on that tax return.
You should also present your evidence in as professional and orderly a fashion as possible. Remember, your auditor is a human: when you throw piles and piles of unorganized documents at them, that’s essentially adding fuel to the fire that there will be discrepancies, and they may take that as carte blanche to dig even harder. On the other hand, if your records are professionally prepared and neatly presented, you stand a better chance of limiting the scope of their investigation.
You’ll want to catalog and prepare a variety of commonly relevant and requested documentation for your audit. That often includes:
If you’re faced with the intimidating prospect of having your small business audited by the IRS, you don’t have any time to waste. Contacting a veteran tax attorney at Abajian Law can make all the difference in terms of emerging from your audit experience unscathed and with your finances intact.