Whether you are running a small business or a corporation, auditing by the IRS is a painstaking process that could cause problems for your business. This usually happens when an auditor finds discrepancies in your records, tax returns, or income reports to name a few. You can pick certain red flags from IRS auditors. But, you can prevent it easily by following the tips that we will be mentioning afterward. For now, let’s start with the tips that will help you safeguard your business and prevent audits from occurring again.
Review Audit Letter
After you have received an audit notice, open it up and read everything thoroughly. Try to understand the issues that the auditor has mentioned in their notice. If you cannot find out the red flags yourself, get help from professionals. You can use tax attorneys that will make you identify the problems. Furthermore, remember that avoiding a response or delayed actions will only make the auditor suspicious.
Sort Out Records
Before appearing in front of the auditor, go through your financial records, bank statements, tax returns, income, and expenses. Furthermore, gather the documents that the auditor has mentioned. Study them, find any discrepancies, and make sure you have hard copies of the relevant documents. You need them as proof when meeting the auditor.
Answer Relevant Questions
The auditors will always ask you many questions that could include information on the accounting records or your tax returns. Don’t answer anything that is not asked, and wait to answer until you understand the question clearly. Restraining yourself from providing unasked information is necessary as it can easily lead to more questions.
Right to Retain Representation
As a taxpayer, you have the right to select a representative that could negotiate with the audit team on your behalf. These professionals have enough experience to handle audit representation and are highly familiar with the process. Moreover, a strong representation is necessary, and only a professional tax audit representative would be able to safeguard your interests. As several professionals offer their services, try to research, get recommendations, and then decide accordingly.
Provide Authentic Information
Suppose, for some reason, you fail to produce the required documents like records for your income and expenses. In that case, the financial auditor will eventually estimate your earnings that could cause problems afterward. It’s also possible that the agent might impose a hefty fine due to failure to produce the required documents during auditing. Additionally, records for the equipment used in your business, property records, vehicle repair maintenance expenses, traveling expenses, and even meal records should be well documented as the auditor will eventually look at these things too.
Now that we have discussed the ways to protect your interests during an audit let’s read on to know the triggers or red flags that create suspicion in the first place, leading to an audit.
- If your business is not doing well in terms of profits for a few years, there are high chances that you might get shortlisted for an audit as fraudulent businesses use this tactic to stay afloat.
- When you are late in filing your tax returns, the IRS might notice this unprofessional behavior and flag you for further investigation.
- Cash-based businesses require financial documentation of transactions to be done in a detailed manner. Underreporting in these types of businesses raises red flags.
- Cryptocurrency transactions also cause suspicion as doing business based on cryptocurrency leaves very little information.
- Filing your taxes on paper can cause a lot of errors. Statistics from the IRS reveal that the error rate of businesses that are filing taxes on paper is around 21% whereas filing taxes electronically cut down the error rate to less than 1%.
Strong leadership is crucial for any business to run smoothly. There are specific rules and regulations you can work on to improve the documentation process at your office. Moreover, building a system of quality control and implementing risk management policies also help by many folds. Lastly, never panic or get worried when you have been served a notice for an audit, as even simple record-keeping errors can trigger an audit.
The best way to avoid these audits is by complying with the regulations set up by the IRS. If you are not comfortable following up on every record, hiring tax attorneys or accountants to perform internal audits also helps many folds. Doing so reduces the chances of raising red flags as you can quickly identify most discrepancies when conducting an internal audit. We hope that you find the above-mentioned information useful in resolving the potential issues related to your business and helping you avoid audits in the future.