An audit is a constant reality for any company because the IRS looks for red flags in business tax returns and randomly selects companies to audit.
If you need peace of mind so that you can continue running your business, it’s important to understand the level of audit support your company might require.
Consider Your Audit Risk from Low to High
Are you concerned about a potential red flag in your return? Or, did you recently receive a letter from the IRS? No matter why an audit is on your radar, there are specific concerns that you will need to address to get you through this interruption. Consider these five signs that your business needs audit support.
– Business Losses: This is a possible trigger for companies that have been in business for any length of time. The IRS might be interested in whether you are taking too many deductions or mixing personal and business expenses.
– Cash Transactions: If you run a retail store, car dealership, medical practice, or any other type of business that accepts credit cards, the IRS has the ability to match up credit card transactions with the information reported on your business tax return. If the IRS finds a material discrepancy, it could trigger an audit.
– Math Mistakes: Electronic methods for filing your tax return has mitigated the risk of math mistakes. However, you should still review the numbers before submitting your return. Because you know your business so well, if something does not add up, you should take the time to look into the discrepancy. Otherwise, the IRS will likely discover the error.
Although you have not received a letter from the IRS at this stage, if you are concerned about these areas from your most recent tax return, then it’s a good idea to consider audit support to be proactive.
2. Variable Risk: Subject to a Random Audit
Now, you have received an audit letter from the IRS. In this category, you are the subject of a random audit to review your business. The IRS is looking to dive into your business to ensure that you submitted an accurate tax return that reflects your business activity and financial position.
To avoid being subject to additional taxes or even a penalty, you should ensure that you have accurate and verifiable records to support your tax return. The important items include:
Receipts (physical or digital) that link to each recorded transaction
If you are confident in these areas, you should be able to provide the appropriate information to the IRS to defend your tax return. However, if you do not have reliable records or are not confident in your set-up, you should consider audit support.
3. Low Risk: A Correspondence Audit Letter
In this situation, you will receive a letter from the IRS requesting additional information on a specific aspect of your tax return. The IRS will likely request a form of proof, such as receipts, that support the item.
If you have the information the IRS is looking for, you can mail back the proof. This “correspondence” should satisfy the request and complete the audit.
However, if you do not have proof to satisfy the IRS’ inquiry, then you will likely need audit support. You might still incur a penalty or fine, but third-party support will at least help you know what information to submit to the IRS. This will help you directly answer their request without giving away information about your business that is unrelated to this specific request.
4. Medium Risk: An Office Audit Letter
If you receive a letter from the IRS requesting an office audit, then you need to start thinking about how to gather up all of your financial records from the past year.
In this audit situation, the IRS wants to examine your business activity and recordkeeping. When you visit a local IRS office, you will need to bring your business’ financial records and documents to compare against your tax return for accuracy.
It is also recommended that you bring a certified representative with you to the IRS office. Whether a CPA or tax professional, this person will help answer questions, stick to the facts of the review, and represent your best interests. In this case, you need to strongly consider audit support.
5. High Risk: A Field Audit Letter
The fifth sign that your business needs audit support is when you receive a field audit letter. In this case, the IRS is requesting a visit to your place of business to review your entire operation.
Unfortunately, something in your business tax return triggered a major red flag that the IRS needs to verify beyond a letter in the mail or IRS office visit.
This is a very involved and lengthy process that includes a full review of your transactions, records, accounting set-up in QuickBooks, and the accuracy of your financial reports. A CPA or licensed tax professional is necessary to help you answer the IRS agent’s questions as thoroughly as possible without submitting unnecessary information.
How Can Reynolds and Associates Help with Audit Support?
Our team of professionals also know what the IRS is looking for before or during an audit. We can provide guidance and support as you walk through the audit process so that you can continue running your business.
Contact our firm today to have a conversation about how we can provide audit support for your business. We would appreciate the opportunity to serve you and provide peace of mind during this interruption.
About the Author
Gene is the Founder and President of Reynolds and Associates, a Houston-based CPA Firm. He has spent 42 years helping Houston entrepreneurs navigate their enterprises thru both calm and stormy waters.