Many Washington entrepreneurs take advantage of the tax code and its various deductions, but things don’t always work smoothly, even for honest business proprietors. The Internal Revenue Service may send a letter notifying the taxpayer of an audit. Preparing for an audit is a wise decision.
What to know about a small business audit
Audits take many forms, including the typical image of a taxpayer called to a local office to address questions about reported profits, deductions and more. Venturing into such a meeting with a qualified representative might be advisable.
Often, an audit involves mailing a response and evidence to address IRS concerns. While not as stressful, responding with appropriate documentation is necessary. Otherwise, the IRS examiner may uphold a proposed assessment of additional tax. Keeping accurate records and receipts would help someone dealing with the IRS. Hopefully, the small business has detailed accounting records as mandated by the tax code.
Small business tax audit issues
There are several reasons why the IRS may perform audits on small businesses. A sole proprietor who deals in large cash transactions and reports smaller-than-average income could raise alarms, for example. The same might be true when seemingly personal expenses appear as business expenses. High amounts of charitable deductions may result in closer tax examiner scrutiny as well.
Be mindful that an auditor discovering negligence or outright fraud could lead to penalties. “Sloppy” returns might end up facing civil penalties, and persons attempting to defraud the IRS might receive an indictment.
The IRS could find problems with a return and assess high taxes. That’s not necessarily the end, as the taxpayer may appeal or explore a reversal in tax court, but these processes come with their own costs.