What the IRS Looks for When Auditing a Business
If you are a business owner and have been contacted by the IRS about being audited (or you are just looking for information in case it happens to you), take a deep breath. While an audit can be stressful, the key is to be prepared and ready to answer questions that an auditor might have for you. Spend time gathering all documents related to your tax return together – be organized, calm and thoughtful about all of your communication.
Auditors have an agenda when they begin an audit and are generally looking to see how you match up to the information that you filed on your return. When they come for the audit they will likely have an eye on the following things:
- How does your lifestyle mesh with your tax return? To assess true income level, the auditor may pay attention to things like the kind of car you drive, how you dress and whether you have high end furniture in your office. The more of a discrepancy the auditor finds, the more questions he/she will likely ask you.
- How do customers pay you? If your business handles large sums of cash, expect some significant digging around, as it is very easy for businesses that operate on cash to underreport income.
- Do you write off personal expenses as business expenses? Again, the auditor is going examine any areas where you could blur the lines of business and pleasure. For example, you will want to make sure that you have all backup documentation related to travel, entertainment and meals ready and accessible. You must be able to explain a true and legitimate business purpose to write it off. If you use your car for both business travel and meetings, but also take it to the doctor, you will need to be able to justify all of the business write-offs you make. Auditors will look hard at this type of thing.
- Payroll: One thing that will no doubt be looked at during an audit is your payroll. An auditor will want to see that you are paying employment taxes on each of your employees. Be ready to show documentation of this. If your business hires “independent contractors” to work for you, an auditor will definitely look closely at this to be sure that they are classified correctly and should not actually be employees of your company.
- Income: If there is any hint that you have not reported all of your income, this will raise a big red flag with the IRS. An auditor will be looking closely for areas where you may not have included all of your income (and therefore did not pay enough taxes). This is a big issue and one that could land you in additional trouble, so you may want to enlist the help of a tax professional if you are concerned about this.
Get Audit Support from Success Tax Relief
Success Tax Relief has more than 30 years of experience providing individuals and businesses with strong audit support. We understand that this is a stressful time and we can help you navigate the difficult process. If you have been contacted by the IRS about an audit, give us a call at 1-877-958-6638 today and let us deal with the IRS for you.