If you are a business owner or wish to start a business, then you must familiarize yourself with tax audits.
Internal Revenue Services (IRS) can access your financial information, based on fraud suspicions. It is when there are discrepancies found in the financial statements of any business that the IRS usually interferes.
However, it is noteworthy that they are not always right. In other words, there could be times when the IRS’s suspicions could be false.
In that case, you must also know how you can defend against a tax audit.
But before that, you must know how vulnerable your business could be.
In this article, you can find all the necessary information you need to defend your business against coaxed tax audits.
Know the types of Tax Audits
To your surprise, not all audits are all the same. Depending upon the suspicions and discrepancies, the IRS can audit your business for four reasons. Hence, the four types of tax audits.
One of the most common reasons for IRS audits is when the information you share and the one that the department has does not match. You may receive a 566 Letter notice, asking you to share more information about specific expenses or income in your return. Or otherwise, you may receive a Notice CP2000 to adjust underpayment or overpayment of your taxes.
For instance, you might include an expense twice which could reduce the tax that you may have to pay. Or otherwise, “double taxation” might be another instance for the IRS to question your returns. In either case, you would need to respond back to the notice specifying whether you agree or not.
The second type of tax audit is an extensive process and could involve a thorough inspection of your business records. Usually, the Revenue Officers would physically visit your business for inspections.
It is noteworthy that they may try to expand the scope of the inspection. And for this purpose, they are most likely to interview your employees and staff. Anything that you or your employees say can be used against you.
The third type of audit that you may face is a TCMP (Taxpayer Compliance Measurement Program) notice from the revenue department. Notably, these are not very common, since the IRS only audits a select few businesses to evaluate DIF scores.
A Discriminant Function System Score, or DIF score, is what helps the IRS determine the compliance of businesses every year. It is essentially a tool for the IRS to know how well the country’s businesses are abiding by the tax laws.
Lastly, you may receive a notice to appear in the IRS office for questioning. Office audits are usually not as extensive as field audits, but they are also not as simple as correspondence audits.
Of course, when the IRS believes that the discrepancies require more scrutinizing they may either send you a Schedule A notice for itemized deductions, or a Schedule C notice for issues in Business profits and losses. Or they may also send a Schedule E notice regarding your rental income or expenses. In any case, you would need to appear in the IRS office on or before the specified date.
It is quite understandable that if you overlook any of these audits, financial repercussions could be gruesome. Therefore, you must also familiarize yourself with the ways to defend your audits.
How to defend?
If you ever receive any of the aforementioned notices, then the very first thing to do would be to respond to them. As already mentioned several times, if you fail to respond back to the audit notice, you may fall prey to further scrutiny.
However, it is better to discuss your returns with your accountant or your tax attorney before responding. The professionals can help you understand the issues and respond the right way. In legal matters, formatting and precision are very important, especially if it involves high stakes.
After responding to the notice, you must try to sit and familiarize yourself with your business’s finances. It would mean that you need to go through the receipts, returns, statements, and ledgers of the specified year for audit. This might help you answer the officers’ questions during the audit.
The last thing that you must be prepared for is going through a legal trial. In that case, it would be better to have a tax attorney by your side, for they may know how to get you out of trouble. Or at least, help reduce the penalty for the discrepancies.
To sum it up, receiving an IRS audit notice is not that uncommon. However, you only need to know how to defend and protect your business from financial troubles.