How to Survive an IRS Tax Audit of Your Business
The Internal Revenue Service performs tax audits on businesses and individuals to assure that all income is reported, that expense deductions are legitimate, and in general to assure that the business is complying with the tax laws. A tax audit can be a scary process, but it's easier to survive if you have the information in hand. We will walk through the process step by step to show you that it's a pretty simple process and that you can come out the other side intact. It certainly doesn't guarantee that you won't have fines or penalties, but it can help you understand the process better.
The IRS says it audits taxpayers (including businesses) for one of three reasons: random sampling, computerized screening, and comparison of information received by the IRS. Find out more about why your return may have been selected for audit.
You always have the option of having someone assist you with the IRS audit process. You may decide to have your representative do all the work, or you may want your representative to go with you to the audit. The best person to represent you may be the person who prepared your business tax return. If your tax preparer was a CPA, tax attorney, or Enrolled Agent, he or she may represent you before the IRS; read this article to find out more about who can represent you in an IRS tax audit.
The IRS may decide to audit your business in one of three ways:
- By correspondence (letter), requesting information through the mail
- By office audit, requiring you to come to the IRS office for the audit, or
- By field audit, in which an IRS agent will come to your business to perform the audit.
Read more about these types of audits.
What is the General Process for an IRS Audit?
The process for an IRS tax audit is fairly simple, for all types of audits. You get a notification, you gather information and submit it by the deadline or appointment date, the IRS reviews your response and issues a determination. Of course, there is more to the process than that.
Before the IRS shows up to audit your business, it's helpful to know what to do. The first thing you need to do is get help from your tax preparer or another tax advisor. Then, get your business tax records in order. Also included in this article are some tips on what the IRS might focus on during the audit.
Audits of home businesses involve several extra factors, including a determination of whether the area set aside for the business is used "regularly and exclusively" for business purposes. CPA Gail Rosen answers some questions about how to prepare for a home business audit.
If you disagree with the IRS determination resulting from your audit, you may take your case to tax court or go through the appeals process. There is a simple appeal process if the total amount you owe (including fines and penalties) is $25,000 or less, and a formal process for larger amounts owed. The key to getting an appeal heard is to file in a timely manner and to base your appeal on tax law, not based on moral, religious, political, constitutional, conscientious, or similar grounds.
Scott Estill discusses U.S. Tax Court, how a case gets to tax court, what happens during the court process, what are your rights as you go to Tax Court, and your right to appeal.
A former attorney for the IRS. Mr. Estill currently practices law in the Denver area, with a practice centered on tax law. He is also the author of several books on taxes, including Tax This! An Insider's Guide to Standing up to the IRS.
The IRS audits businesses for a variety of reasons, and you may not be able to prevent an audit, but you can minimize problems resulting from an audit by incorporating sound business practices into your company. Learn about six areas the IRS pays careful attention to and how to minimize your chances of being audited for these practices.