According to recent studies, the IRS aims to increase small business audits by nearly 50% in the coming years (Weltman, Smallbiztrends). This means that your business has a heightened probability of being selected for an audit. In the event you do receive a letter from the IRS, you need to be aware of the different types of audits to effectively plan your next move.
The first and most common type of audit is a correspondence audit. Correspondence audits general are sent to you in the form of a mail letter asking you to clarify or substantiate a certain section of your filed return. Letter 566 will be issued, requiring you to respond in a specified time frame. If the inquiry is not in your favor, you may be assessed fines and penalties for the mistakes; however, there are abatement requests you can ask for.
The next type of audit is an office audit, which is reserved for more complex tax issues that can’t be easily solved through a correspondence audit. The IRS will send an employee out to your business to ask questions on your return through an office interview. You want to remain fully prepared for an office audit to minimize your risk of an unfair decision. If the auditor uncovers other issues during the office audit, they may expand the scope of procedures.
A field audit is a comprehensive examination into both the accounting and tax records of your business. The auditor will be on-site to examine documents and ask clarifying questions. A field audit can include interviews with office personnel and employees, touring your office, looking into internal controls, and assessing your financial records. These procedures can last days to weeks depending on the scope of the audit. Field audits are less common for small businesses and more popular in large enterprises.
Each of these audits can result in an unfavorable judgement for your small business. Business owners who aren’t well versed in dealing with the IRS shouldn’t try and go through the audit process alone. Instead, contacting Tax Geaks can help ensure your business is properly responding and conversing with the IRS, giving your business the best chance of a favorable judgement. Contact a team member today to go over your specific situation.