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Understanding IRS tax audits

On Behalf of | Dec 20, 2021 | Tax Law |

The IRS may decide to audit your small business to check whether the reported taxable loss, income, deductions, and expenses comply with the federal tax laws. If there was a mistake, your business could be liable for interest or penalty. Most business owners and corporations are scared of the IRS for a good reason. However, there is no reason to worry, as the IRS audits less than 2% of all businesses in the country.

It would be best to prepare for a tax audit before it happens. Here is what to expect and when the IRS comes knocking.

What to do when the IRS knocks

Respond to notifications

Before the IRS can do an in-person audit of the business, it usually notifies you that there are errors in your business tax returns. It requires you to provide the documents to support your returns or collect the errors they have mentioned.

Get your accounting department to check the areas that the IRS has highlighted in their notifications. If the errors are genuine, respond by sending a corrected version of the returns. That should settle the matter. However, if the IRS missed something or its assumptions are incorrect, write to them stating why your submissions were correct. They will review the case and respond appropriately.

Prepare for in-person audits

If the IRS suspects massive fraud or your response is not satisfactory, it may audit the business accounts. It will notify the company when it intends to come and check your books in most cases. This would take a day to a few days for them to check your records.

Here are a few things you should do to prepare for an in-person audit.

  • Avail all relevant books of accounts and evidence of transactions such as receipts and invoices
  • Check the tax law to determine if you have met all the requirements.
  • Get one or a few of your in-house accountants to work with the team from the IRS.
  • Look at the Audit Technique guides at the IRS. The IRS has a Market Segment Specialization Program (MSSP) where it specifies what to check in any audit depending on the type of business.

The IRS will notify you of the results of the audit. If the taxes you filed were incorrect, the IRS might add a penalty to the amounts due. However, it may initiate court proceedings against the organization if it detects tax evasion and fraud issues.