Receiving an Internal Revenue Service audit notice can be stressful. The IRS selects companies for audits for various reasons. Here are the most common:
- Random selection: Sometimes, the IRS selects businesses randomly based on statistical formulas.
- Document mismatch: Discrepancies between your records and what’s reported by others can trigger an audit.
- High income: Companies with a high net worth face more scrutiny due to the potential for more significant tax discrepancies.
- Industry norms: The government may audit your business if your expenses or deductions significantly deviate from industry norms.
- Related audits: Your business may also be selected if you’re connected to another audited entity.
Understanding why audits occur can help you prepare.
How should I prepare?
Getting ready for an IRS audit involves gathering and organizing your records. Here’s what you need to know:
- Documentation: Collect all relevant financial documents, including tax returns, receipts, bank statements and invoices.
- Postponement: You can request a delay if you need more time to gather information. Contact the auditor as soon as possible to discuss rescheduling.
- Look-back period: The IRS usually audits returns filed within the last three years, but it can go back further if it finds significant errors.
- Duration: The length of the audit varies. Simple audits might conclude in a few months, while more complex ones can take over a year.
The IRS conducts some audits through the mail, while others involve in-person interviews.
How will the IRS notify me?
The IRS only sends impending audit notifications through the U.S. Postal Service. The agency will never call, email or text you.
If you receive a call or message claiming to be from the IRS, it is likely a scam. Always verify the authenticity of any communication by contacting the IRS directly using the contact information on its official website.
What are the potential outcomes?
An IRS audit can conclude in three ways:
- No change: The IRS accepts your tax return as filed, and no changes are necessary.
- Agreed: The IRS proposes changes, and you agree to the adjustments. This might result in you owing additional taxes or receiving a refund.
- Disagreed: The IRS proposes changes, but you disagree. You can then appeal the decision or enter into mediation.
Understanding how the IRS selects businesses for audits and how to prepare can help reduce the stress of the process. To protect your business, stay organized, know your rights and always verify communications. In many cases, advice from an experienced tax attorney can be invaluable to protect your business.