When it comes to small business finances and tax filings – mistakes can happen. And when they do, tax audits usually happen too. Despite the fact that the best way to prepare for a small business tax audit is to not have to have one at all, there are a few things to keep in mind and prep so you’re ready for your small business tax audit. Lets get started…
Know Which Type of Audit You’re Having
Once you know you’re having an audit, the first thing you’ll want to do is know which type you’re having. The IRS carries out 3 different types of audits and you’ll want to know the differences so you can prepare for your tax audit. The three types of audits are:
- Correspondence audit – happen by letter and the IRS is merely asking for you to verify, correct an error or provide additional documentation.
- Office audit – this one requires you as the taxpayer to visit the IRS office and bring the documents they specify.
- Field audit – this is the most intensive form of audit and requires you as the small business owner to host a IRS official at your workplace and allow them access to any forms, documents or tax return filings within the limits of their investigation.
How to Prepare
Once you’ve been notified of the type of audit you’ll be having, you’ll need to get right to work. Here’s our list:
- You’ll want to visit with your tax preparer right away and provide them with the paperwork that you received from the IRS. Yes, expert help with cost you, but you’ll want someone that knows the ins and outs and can help you not only provide a good response to the IRS’s request but that can help you sort out the mess if there is one.
- If your records aren’t already in order, nows the time. Start gathering your info and organize it according to year and type. A short list of relevant records would include, income, expenses, pension plans, and so on. You’ll want to also request bank or credit card records and any information you might need from your vendors. Whatever you do, don’t make up any records that aren’t available. However, if you have lost records or they were destroyed somehow (say a flood in your office, etc.) then you’ll want to make an attempt at reconstructing those records and document the efforts so it’s clear what you lost and what you’ve reconstructed.
- Make sure that you don’t have personal expenses in your business records. And understand the difference between intentional and unintentional failures. If you’re intentionally minimizing your business taxes illegally that’s tax evasion. If you can show that your mistake was unintentional, the IRS tends to be more lenient.
What the IRS Can Request to See
Just because they’re the IRS doesn’t mean they’re allowed to ask for everything. Knowing your rights is a way to protect you and your business. It’s also a great way to focus in on the problem and get the ship righted quickly so you’re ready for your audit. Here’s what they can request from you:
- any personal or business tax return within three years of the filing date
- can collect back taxes for up to 10 years
There are exceptions – if you’re being audited due to tax evasion, filing a false return, or filing no return at all, the amount they can request for you can be a lot broader.
Even if you’re not getting ready for a tax audit for your small business, knowing is half the battle. One of pieces of advice we give most often to small business owners and entrepreneurs alike is to keep records and to update them regularly. If you’re tracking your finances you’ll have a better chance at your business succeeding, have less hassle when it comes tax time, and be ready to provide the records you have to the IRS in case you receive notice of an audit.
FAQs:
What are the different types of tax audits for small businesses?
There are three types: Correspondence audit (by letter), Office audit (in-person at IRS office), and Field audit (at your workplace).
How should I prepare once I know the type of audit I’m facing?
Consult a tax preparer promptly, organize your records by year and type, and gather relevant financial documents.
What if I’ve lost some records required for the audit?
If records are lost or destroyed, make efforts to reconstruct them and document your attempts for clarity.
What is the distinction between intentional and unintentional errors in records?
Intentional errors constitute tax evasion, while unintentional mistakes are typically treated more leniently by the IRS.
What documents can the IRS request during a small business tax audit?
Typically, they can request tax returns for up to three years and collect back taxes for up to ten years, with exceptions for cases involving tax evasion or filing false returns.
