It’s many business owners’ greatest fear. No, I’m not referring to bankruptcy, trade secret theft, or the loss of a valuable employee.
I’m talking about a letter from the Internal Revenue Service. Even if you do receive that dreaded IRS letter, there’s almost certainly no reason to panic. In fact, having your business audited could provide you with new insight about your current financial standing. But before you do anything else, take a deep breath and follow these four simple steps:
1. Determine Which Kind of Audit Your Business Is Facing
While many people think getting audited means an IRS agent showing up with a clipboard in-hand, audits rarely happen in person. The IRS conducts three kinds of audits, only one of which involves a physical examination of your business. The notice you receive will inform which kind of audit you’re facing:
- Correspondence audits are the most common and least intensive form of IRS audits—they’re done through the mail. Over 80% of audits are correspondence audits.
- Office exams are the second most common form of IRS audit. As the name suggests, an office exam involves a face-to-face meeting with an agent at a local IRS office. These are typically over within a day.
- Field exams are the rare kinds of audits that occur at a place of business. When the IRS performs a field exam, the agency is usually searching for a specific piece of information that cannot be found in the company’s books.
2. Call Your Accountant
Regardless of the scope of the audit, be sure to contact your accountant about it as soon as possible. Your company’s financial advisor will help you understand what the IRS is requesting from you and what information you need to prepare.
Your accountant should be equipped to…
- organize all your financial information in advance of the audit;
- run through potential questions, uncertainties, and challenges you may face from an auditor; and
- represent your business and communicate directly with the auditor in the case of an office exam or field exam.
3. Respond to the IRS As Soon As Possible
Once you’ve received an audit letter from the IRS, the biggest mistake you can make is to delay your response. Together with your accountant, take a close look at the information the IRS is requesting and get the necessary forms, data, and paperwork in order. You may be asked to provide information such as the following:
- canceled checks
- legal papers
- loan agreements
- medical documents
- travel documents
- employment records
Additionally, the IRS may require you to fill out one or more questionnaires. As soon as you’re ready, send a copy of everything (do not mail original documents) to the address included in the notice you received.
4. Prepare for the Audit in Advance—and Be Ready to Potentially Dispute the Findings
When the IRS audits your business, the agency is asking a fairly straightforward question: Is this tax return accurate? The answer could involve a rigorous and broad-ranging investigation into your books, or it could rest on a narrow expense category—or even a single line item. It all depends on the details of your business and the reason why your return was flagged. Keep in mind that some returns are chosen at random.
Because you may not know what the IRS is looking for, you need to be prepared to answer any and all inquiries an agent may have. These could include questions about your revenue, equipment, and payroll. Be polite and give answers to the best of your ability, but don’t provide more information than you feel is necessary.
Moreover, don’t hesitate to—respectfully!—disagree with the findings of an audit if you feel the agent has made a mistake. You do have the option of appealing an IRS decision.
The best way to handle an audit from the IRS is to let a qualified accounting professional do the work for you. At tempCFO, we can make sure your organization is prepared for an audit—and minimize the chances it will happen in the first place. See why business owners who use tempCFO for tax planning have nothing to fear.