It’s every business’s worst nightmare – an IRS audit. But what really happens when you’re audited? Most businesses don’t actually understand what the IRS does during this process, despite worrying over it.
Here’s what you should expect when the IRS comes knocking, and how you can navigate the process successfully.
What The IRS Looks For
When deciding who to audit, the IRS takes a number of factors into account. For example, as a business, reporting losses isn’t necessarily a warning sign; it may just be the truth. However, if you’ve reported a net loss for three or more years in five, you’re likely to face questions. Be sure that you can show clear evidence, including receipts and payroll documentation, to support your claim of losses.
Salary reporting may also come under scrutiny because you’re a small business. Be sure that the salaries you report are accurate, and that your payments are appropriate for your industry. The IRS tends to become suspicious of excessive salary reporting on the part of small businesses, so if you really don’t want to be audited, be mindful of your early hiring practices, especially in you’re in the red.
This next audit trigger may be surprising, but one of the things that the IRS looks for when deciding who to audit are round numbers. If you’ve rounded income, deductions, or other numbers, on your tax forms, they may come to check your documentation. Even though it may seem like no big deal to you, the IRS wants precise numbers, not a general sense of your business’s finances.
Potential Audit Outcomes
Whatever sends the IRS your way, it’s also important to understand what your options are to cope with this situation. For example, just as you would hire a tax preparation service to complete your taxes initially, you don’t have to go through the audit process alone. In fact, you can and should bring representation to your audit appointment. There are lawyers who specialize in tax law and they can help you navigate what is often an overwhelming and confusing process.
Once you’ve had your audit appointment, the IRS will make a number of decisions. They may conclude, based on the documentation presented, that you have filed your taxes appropriately, in which case your business is in the clear. However, if you’ve underpaid your taxes, there may be serious consequences.
Underpaid taxes discovered in the course of an audit can leave your business in a tenuous position, especially since these late payments are also subject to fines – and this is why you need legal representation. Rather than having to pay up all at once, a lawyer can help you negotiate an installment plan or settlement agreement or even demonstrate to the IRS that your debt is just not collectible at this time. This can help keep your business on the right track, or at least prevent you from falling into bankruptcy.
If you don’t agree with the findings resulting from your audit, remember that you can appeal the result. Many people are so intimidated by the audit process that they overlook this fact, but if you’re working with a lawyer, they can determine whether an appeal is likely to succeed and support you through the process.
Perhaps the best way to navigate the audit process is by accepting that this is just part of running a business. Many companies, even small ones, will be audited during the course of their existence, but if you’re doing your taxes every year and doing them honestly, your audit will come out in your favor. It’s a financial checkup for your business, not a punishment.