Have you ever wondered what would happen if you get audited by the IRS? It can be downright terrifying. Audits can last months. During that time, you may fear that you made a mistake that could cost you thousands in fines or even your freedom.
The fear is more justified if you don’t know what to do. You need to work with the right people and understand the process.
Getting a notice from the IRS that your business is going to be audited by the IRS is stressful. It means the IRS has found a discrepancy in your tax returns and wants to go through your business accounts. You most likely made an innocent mistake or didn’t do anything wrong, but the IRS flagged you for an audit anyways.
The first thing to do is to call your accountant to find out what steps to take. Here are some of the ways the IRS conducts an audit and what you can expect from the experience.
How Many Tax Years Are Investigated?
The IRS typically investigates a maximum of three years of returns. Legally, you are required to keep tax returns for up to three years from the date they were filed if they were filed normally and there were no issues. However, as a business, you’re best served by keeping your records for up to seven years, regardless if there was a profit or loss in any of those years. The IRS only goes back three years during a typical audit, but it will go up to six years back if the auditor found something suspicious and wants to investigate further.
What Happens During an Audit?
The IRS will tell you where it plans to perform the audit. Auditors can do the audit in your place of business, in an IRS office, or through the mail. If the auditor comes to your place of business to perform their work, it’s known as a field audit. In all settings, you will be asked to provide specific information such as past tax returns, bank statements and any other relevant financial information you have available.
The auditor’s job is to investigate the information you provide and determine if it matches with the information on the returns or if there is a discrepancy. You will be asked questions about the information, so be prepared to explain the decisions you made when reporting income to the IRS.
How Long Does an Audit Last?
There is no defined time limit for an audit. The IRS has the option to take as much time as it needs to find the information it’s after. How long it takes to complete an audit depends on factors like the type of paperwork requested, how much documentation is needed to defend choices made, the amount of returns requested, and whether an impropriety has been uncovered or not.
Your best bet for a quick audit process is to supply all the paperwork requested from the beginning. Make sure it’s laid out in a clear and concise manner to reduce the amount of time the auditor needs to go over the information.
An IRS audit does not mean that the IRS will close your doors. You may have to pay a penalty in the event an auditor uncovers a discrepancy, but if you’ve done everything else right, you’ll be in the clear. And if you’re not sure how to deal with an IRS business audit, consider getting professional help so you can get the best outcome possible.
Be Smart to Survive an Audit
Getting through an IRS audit won’t be a picnic. But if will be a lot easier if you are going to take the right steps and know what answers to give.