Should You Be Prepared For An IRS Audit?

As a business owner, you may be worried about the possibility of an IRS audit. Luckily, the chances of being audited are at a historic low -- with the audit rate at 0.6% in 2018. The rates for businesses and high-income individuals are a bit higher at 2%, but still extremely low.

Although there is never a 100% guarantee that an IRS audit won't happen, since some returns are picked randomly, the good news is that there are steps you can take to help prevent an audit. One measure is completing your returns in a timely and accurate fashion with our firm.

To help know what to avoid, here are some tips on what might catch the attention of the IRS.

Audit red flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:

• Significant inconsistencies between previous years’ filings and your most current filing,
• Gross profit margin or expenses markedly different from those of other businesses in your industry, and
• Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them ― for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

• Understand what the IRS is disputing (it’s not always crystal clear),
• Gather the specific documents and information needed, and
• Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.

If you have any questions about the IRS audit process, contact your Whittlesey advisor.