Owning and running a small business can sometimes be financially complex. But following tax laws can help you avoid costly penalties. And while the idea of an audit can be daunting, knowing what to expect and how to prepare can make all the difference.
What causes a tax audit?
Tax audits are not always a cause for concern, but they are usually triggered by red flags in your tax filings. For small businesses in Michigan, common reasons include inconsistent income reports, unusually large deductions, late filings or significant changes in income or expenses.
How to prepare your business for a tax audit
Becoming overwhelmed is understandable. Here are a few steps to help you navigate the audit process with more confidence:
- Keep detailed and organized financial records: Track income, expenses, assets and liabilities using a consistent system.
- Maintain receipts and documentation for deductions: Save receipts, invoices, mileage logs and contracts to back up all claims.
- File taxes accurately and on time: Avoid delays. This can attract unwanted attention.
- Respond promptly to tax notices: Do not ignore these notices in order to avoid further complications.
- Consult a tax attorney: A legal professional can guide you, protect your rights and handle communications with tax authorities.
Taking these precautions will help your business stay compliant and ready for a tax audit.
What happens during an audit?
If your business is audited, the process generally includes:
- Notification: The Internal Revenue Service (IRS) or your state’s tax department will send you a letter outlining the scope of the audit.
- Examination: The agency will review your financial documents. In Michigan, you are entitled to a full copy of the audit report and working papers.
- Informal conference: You may request a conference to present your side and provide testimony before a final decision.
- Inquiry or interview: Auditors may request interviews or ask clarifying questions. Having legal representation is highly recommended.
- Settlement: You can propose a written settlement in the case of a dispute.
- Response and negotiation: You can provide more documentation or challenge the results if you disagree with the auditor’s findings.
- Final decision: You may appeal the findings through the agency or in tax court if no resolution is reached.
In any case, having legal counsel can help you go through the audit with more ease.
Proactive steps for protecting your business
Moving through the financial landscape of business ownership does not have to be a constant worry. Should you be notified for an audit, always remember your right to legal counsel throughout this process. Taking these preventative measures and knowing when to seek professional guidance safeguards your business.