The Internal Revenue Service (IRS) has the power to review financials and enforce tax laws that govern all American businesses. These official financial examinations are known as audits, and they can be seen as inconvenient, tiresome, and even scary to some business owners due to the possibility of facing negative consequences for inaccurate financial statements.
However, law-abiding business owners shouldn’t interpret a letter or phone call from the IRS as the end of the world. First, the IRS can only audit just under 0.5% of all American S corporations and partnerships each year, so the odds of being audited are low. Even still, if your business is audited, with preparation, honesty, and detailed organization, audits can be handled quickly and easily with no ramifications.
Small businesses being audited should adhere to the following guidelines:
Keep calm and responsive
While a notification from the IRS means they suspect something is up, don’t panic. As a business owner, if you cooperate and remain transparent, any errors can be remedied quickly and painlessly. By ignoring the IRS and trying to hide information, your financial problems can escalate and lead to headaches from the IRS digging deeper.
Maintain thorough records
The IRS generally reviews documents from the last 3 years, but they have the power to go as far back as 6 years. Retrieving documents from so long ago can be extremely time-consuming if you, the taxpayer, keep unorganized records. With some preparation and organization, taxpayers can provide the requested documents for IRS agents and the audit process can go much more smoothly.
Call for help if needed
Audits can be confusing, so there’s no shame in consulting a specialist or tax lawyer. Business owners handling an audit without help may take longer, misplace important information, or accidentally raise red flags that concern IRS agents, inspiring deeper investigation and more headaches.
Avoid activities that raise suspicion
The following list of business practices will raise the likelihood of being audited:
- Reporting a net loss at least twice in the last 5 years
- Filing tax returns and paying taxes consistently late
- Spending excessive amounts of money on meals, business travel, or entertainment
- Attempting to avoid paying taxes by storing money in tax-exempt charities
- Participating in confusing or ambiguous transactions and investments
- Doing business primarily in cash
- Rounding numbers
Know your rights
With the knowledge of bad practices in mind, you should also be aware of your rights during an audit. These rights, as written by the IRS, include the right to:
- Professional and courteous treatment by IRS employees
- Privacy and confidentiality in tax-related matters
- Know why the IRS is asking for certain information, how the IRS will use it, and what will happen if this information isn’t provided
- Be represented by yourself or an authorized representative
- Appeal disagreements, both within the IRS and the U.S. judicial system
Organization, transparency and honest business practices are the best defenses for unwanted IRS attention. Fraud and negligence may provide short-term financial gains, but responsible business owners realize the risks of fines, business shut-down, and jail time make accuracy and integrity essential to operation. Honest people make mistakes too, so stay organized, know your rights, and don’t be afraid to appeal an audit result.
Have questions about your tax compliance? Speak to one of our experts today to make sure you’re taxes are on track.
