A tax audit can hinder a small business during an inopportune time. The following guide describes reasonable and justifiable ways to prepare for, deal with, and resolve and audit so you can remain focused on business growth while assessing your risks related to tax controversies.
Click https://en.wikipedia.org/wiki/Income_tax_audit to know more about tax audit.
Why Small Businesses Get Audited
Most audits stem from the differences between a taxpayer’s return and that of a peer, or some third-party data that the IRS has access to. Knowing the common reasons that a small business may trigger an audit will prepare owners to better manage risk before receiving a notification of audit.
- For example, large or unusual amounts in deductions in relation to revenue, and especially for meals, travel, and home office.
- Or a mismatch of returns vs. third-party information reporting forms, such as W-2s, 1099-NEC / 1099-INT, and 1098s.
- Cash heavy transactional activity, on-going contractor issues, or proclivity for extending the deadline to file are also significant risk factors that point to gaps in compliance.
Can Proactive Recordkeeping Help?
Yes, proper documentation can often establish the difference between a quick resolution or an expensive adjustment. Any business that closes their books each month, retains source documents, and separates personal expenditures from business, is already half of the way to a successful outcome. Additionally, clean and organized business records help to proof your case to your IRS representative because the straightforward verification of the facts will assist you in principle.
Owners should retain contemporaneous receipts with the business purpose documented, logs to support vehicle mileage, and digital documents to keep invoices, bank statements, and other supporting documents. Each month, each account and its ledger should be reconciled and all monthly deductions supported with documentation, payroll reports to support wages and form 1099 for other non-employee compensation. When everything is settled on day one, the examiner’s scope tends to be narrow and therefore, people have less potential for a penalty.
Do Audit Defense Strategies Differ for Businesses?
The proper strategy depends on the type of entity, the margins within the industry, and the nature of the deductions. A manufacturer, contractor, and professional services company can all be profitable, but spend money in completely different ways. Customizing the strategy, often after consulting from Raleigh, NC tax defense attorney, will help ensure the auditor looks at the return based on the appropriate standards.
- S Corporations are always examined for reasonable compensation; the W-2 payroll should align with the duties performed and profits made by the corporation.
- Retail restaurants need to show the cost of goods sold as derived from documented purchases and inventory counts to support any markup without argument from the auditor.
- Service firms should have documentation that demonstrates independent contractor tests the company performed along with accurate Forms 1099 to avoid a reclassification problem.
Legal Options If the IRS Disagrees
If an examiner initiates a change to the return, other owners aren’t stuck with the examiners first answer. The owners may simply request a conference with a supervisor and provide additional information to the examiner; or provide a written protest to the US Independent Office of Appeals. This process is often referred to as audit appeals. Visit this website to learn how to file an appeal.
If the owners still do not have an agreement with the examiner or appeals, a business could directly petition – often through an annual attorney or CPA preparer, of US Tax Court (generally known as a petition notice of deficiency within a 90 days), litigation or narrow penalty relief for reasonable cause.
Local Counsel who has an appreciation for the industry standard, and the distinct regional approach of the IRS, can assist in framing the facts properly into the record and to assist with negotiating. For business located in the Triangle, who are seeking help with experience may feel free to reach out to this firm:
Cumberland Law Group, LLC
School St #1100, Raleigh, NC 27601
Preventing Future Tax Audit Problems
The best audit defense is to create a return that tells a good story and is well documented. After the audit is over, or as a means to avoid having an audit in the future, ensures the agents (owners) formalized internal controls allows for the story to be consistent between the books and return supporting files.
- Monthly close checklist:reconcile the bank accounts and credit accounts; review unusual accounting entries; and lock all closed periods for review and authorization.
- Standardize documentation:keep digital receipt folders by category, annotate business purpose, and retain signed contracts and W-9/1099 files.
- CPA/Tax Counsel – annual pre-filing review:with plan emphasis testing high risk items (compensation, travel, vehicle use, inventory methods).
If I have timely advice, a disciplined record practice, and an informed strategy, small businesses can trust their audit experience and keep the focus on – serving their customers and growing their business.
