The chance that your business is selected by the IRS for examination is slim. Regardless, it does happen and it’s important to be prepared. How does an IRS audit work? How long does it usually take? What are common red flags examiners look for? Find out now.
Common reasons businesses are selected for audits
- Their computer scoring model found the potential of unreported income high
- You are a large corporation who is audited annually
- Your returns have issues or transactions with other taxpayers selected for audit
- Your area is part of a local compliance project
Whatever the reason your business was chosen, here’s what you can expect during the audit process.
You’ll receive a letter from the Internal Revenue Service (IRS).
This letter will inform you that your business has been selected for an examination, more commonly referred to as an audit of your tax return. The letter should include:
- The entity being audited, and the year(s) involved
- A brief description of your rights and obligations
- A statement detailing the fact that you may have someone represent you during the process
Once you receive this letter, let your CPA know immediately and they can act as your representative.
Complete a Power of Attorney document.
Form 2848, or a Power of Attorney document, will establish your CPA as your audit representative. Once the IRS agent is aware who is representing you, they will send a list of items that they will review during the examination.
Schedule an initial meeting with the IRS agent.
Your CPA will help you gather the requested information and organize it for the auditor. Better organization means a faster overall process (Which is why we recommend using a tool like QuickBooks year-round). It will also make it simple for the auditor to review the most important items. The average length of the first meeting is one to two days.
Tip from the experts
Schedule the initial meeting at your CPA’s office. If the auditor requests access to additional information, your CPA can let them know that information wasn’t on the provided list and is not available at that time.
The auditor may request to ask questions or tour your business. Make sure your CPA is present to handle any accounting or business questions. Stay on point with your answers, give concise responses, and do not engage in small talk. You don’t want to give the IRS agent any reason to extend their examination.
Attend follow-up meetings and receive audit results.
After the initial meeting, the auditor will schedule a follow-up meeting around four to six weeks later. There may be subsequent meetings if needed. At the final meeting they will verbally tell you your results. The verbal notification is followed up with a written communication. If the auditor finds no errors, they will issue an audit report with no changes.
Two common audit traps
As long as all income is being reported, expenses being run through your business are legitimate, and you have a qualified CPA – you should never be worried about your audit results. That being said, there are two specific areas auditors love to examine.
- Meal and entertainment expenses
- Taking someone out to eat for a business-related meeting is deductible, but at a 50% limitation. Makes sure you are keeping receipts, writing down who you met, and what business was discussed.
- Vehicle expenses
- If you use your vehicle for both private and business use, you must keep a detailed mileage log. This could be a journal, your e-mail calendar, a notebook, or even an actual mileage log found at many office stores. The log will include the mileage and the purpose of the trip. Don’t include mileage from home to work. Commuting expenses are not deductible.
