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The IRS has small businesses and high earners in its cross-hairs. If you fall into either category, there’s an increased chance that you’ll face an IRS audit.
Businesses organized as S corporations, partnerships, and LLCs are especially ripe targets. In 2007, the IRS increased its audits of S corporations by 26% over the prior year. It increased its audits of partnerships by 25%. Audits of all businesses increased by 14%.
Audits also increased by 14% for individuals who earned more than $100,000 and by a whopping 29% for those earning more than $200,000. If your tax return is accurate and honest, you’ll weather an audit with flying colors. But even in the best case, an audit can be inconvenient and worrisome.
The key to breezing through an audit is to keep complete, well-organized records of all business transactions.
UNDERSTANDING THE AUDIT PROCESS
If you’re chosen for an audit, how do you approach the process?
First, be aware that the IRS conducts two kinds of audits of businesses and their owners: office audits and field audits. There’s a difference not only in where the audit is held, but also in the intensity of the process.
If you’re a sole proprietor and gross $100,000 or less a year, the IRS will likely ask you to come to an IRS office for the audit. Usually an office audit lasts a few hours.
If you have a partnership, a corporation or an LLC – or a sole proprietorship that grosses over $100,000 a year – the IRS will probably order a field audit. A revenue agent will conduct the audit at your business place.
Wherever the audit is conducted, the auditor will want to see the business records you used to prepare the tax returns. This can include check registers, bank statements, canceled checks, receipts, invoices, and a formal set of books.
An auditor can also require records from your tax preparer, bank, suppliers, customers, and others.
You should be able to handle a run-of-the-mill office audit without professional help. But if you fear that some serious irregularity may surface – perhaps you’ve claimed a huge deduction and can’t produce a receipt or canceled check – consult with a tax pro before the audit.
With a field audit, more money will probably be at stake. Here, it may be best to bring in a tax pro from the outset.
