Getting a notice from the IRS about an audit can be cause for concern. However, it doesn’t have to be this difficult. Essentially, the audit entails that the IRS checks financial documentation and paperwork, just to see if everything matches the tax return filed earlier during the year.
The best way to sail through the audit is to have all the documentation ready ahead of time. This blog serves as a guide for businesses preparing for internal revenue service audits, helping them with their audit readiness and setting expectations.
How to Stay Prepared for Internal Revenue Service Audits
Conduct a self-audit
Before the official internal revenue service audits, conduct an internal self-audit to identify potential red flags and verify the accuracy of reported income. Ensure all claimed deductions are substantiated by proper documentation. Organize all supporting records, including receipts, invoices, bank statements, and mileage logs, and consider filing amended returns to correct any errors before the IRS finds them.
This proactive approach allows businesses to address discrepancies early. It reduces the risk of penalties and expedites and de-stresses the formal audit process. For employees, it also familiarizes internal teams with the audit process. Reducing the risk of any potential risks or additional errors arising before the actual IRS audit.
Review the IRS’s findings
The IRS usually sends a notice letter explaining the inconsistencies and the pointers that triggered the audit. These letters also specify exactly which documents are under investigation. Having a clear, detailed view of what triggered the audit helps businesses understand which of their tax returns, from which year, and any specific income or deductions are subject to investigation.
Gather all financial recordings
For businesses that face an IRS audit, the most important step they can take is to collect, organize, and gather all necessary financial documents. Use the IRS notice as a guide to identify which specific documents are needed during the audit. A key precaution during this stage of audit preparation is to “never” volunteer any documentation that isn’t directly related to the audit process, unless the IRS specifically requests it.
Review tax filing
One of the most common internal revenue service audits triggers is lapses of information in tax documents. By comparing past tax returns with the gathered financial documentation, businesses can have a clearer understanding of their position during the audit and identify any potential errors. The key to an accurate tax review is that businesses must maintain documentation of all their tax forms for at least three years after filing. Though with some tax documents retention exceeding six years, to even indefinitely.
Respond Proactively
It’s best to always be proactive when receiving an IRS notice of a pending audit. The first thing a business should do is respond promptly and carefully consider all responses to ensure compliance and reduce the risk of issues. It’s important to respond within the normal 30 days of an IRS notice). This is essential to avoid incurring additional penalties, interest charges, or losing your right to appeal. The earlier proactive steps are taken in response to an audit notice, the easier it will be to manage the audit process, resolve any miscommunication with the IRS, and establish a good-faith basis, which may help produce a better overall audit outcome.
Get Professional Representation
An IRS audit is a critical moment when a seasoned CPA becomes the most valuable resource for a business. They act as a crucial intermediary between you and the tax authority to help minimize potential liabilities and penalties. A professional representative with experience in taxes not only understands the nuances of complex tax codes but also handles all communications.
This ensures that you only provide relevant information. As a result, there is no pressure to endure the high stress of direct, unguided questioning. A CPA’s job is to organize financial records, assert the applicable rights, and negotiate on behalf of their clients. As a result, an otherwise daunting, time-consuming audit can transform into a manageable, structured process.
What to Expect from an Internal Revenue Service Audits
An IRS Audit is not an everyday occurrence, so many businesses lack information about what to expect. The following is a breakdown of the audit process in three phases, to help businesses gain insight as they move forward with their audit preparation process:
Pre-Audit
Receiving IRD
For the audit process to move forward, the IRS is required to send a formal notice. This includes a unique Identification Request for Documentation (IDR), also referred to as Form 4564. The specific information requested can vary depending on the type of audit being conducted.
Types of Audits
- Correspondence audits: The simplest and also the most common form of internal revenue service audits. These are conducted from start to finish via email or other digital channels, such as phone or text. If the IRS identifies inconsistencies in the financial records, it sends a letter specifically addressing the error and requesting rectification. In this situation, the recipient may either rectify the error and take corrective action or return the digital original return documentation. They should also include a letter to the IRS to correct the mistake.
- Office Audits: An office audit involves the recipient visiting an IRS office to complete the audit in person. The recipient is obligated to bring copies of their required and organized financial records. Businesses during this audit must never take original documents and must always use copies. The key to an office audit going smoothly relies on the organization of the financial records in order. The faster an audit agent is able to match the recorded transactions to that of the receipts and bank records, the more efficient and clean the audit process.
- Field Audits: A field audit is the highest level of complexity possible. A field audit is an IRS Audit Team conducting a full on-site evaluation of a recipient’s records to ensure accuracy, providing the most thorough audit approach. Thus, during an office audit, an IRS Revenue Agent will typically review documentation related to the tax returns under examination. They will also conduct interviews with other employees and, in some cases, tour the facilities used to produce the financial records for the recipient’s business. To facilitate the complexity of the field audit, it is recommended that the recipient engage a tax attorney or certified public accountant to assist with communications and to focus on the specific areas identified in the field audit letter.
Post Audit
At the end of an audit, the Internal Revenue Service issues two major decisions. The taxpayer or recipient will either accept and comply with the findings made by the IRS or dispute them. If they dispute the IRS’s findings, a process is available for initiating an appeal of the decision made on that audit and obtaining a review and/or reconsideration of those audit findings.
Conclusion
An IRS audit can be daunting but understanding how auditing works and approaching it with the right mindset and the necessary preparation can allow for auditing to occur as a normal course of doing business rather than a crisis situation. There are numerous things that companies may consider to successfully complete an audit, including the reasons for audits, timely response to the IRS’s letters and other correspondence, the need to maintain accurate and organized financial records, and conducting self-audits before any internal revenue service audits.
By using all of these criteria & performing all activities prior to an IRS audit, you can achieve a proactive approach to auditing, which will lead to a better overall audit experience and outcome for your business. The use of a proactive approach will help reduce any stress that will be incurred while preparing for and performing the IRS audit; demonstrate to the IRS that your audited company acted in good faith and is being honest; and influence how your audit will proceed positively.
