SAFEGUARDS

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  • Preparing for an Audit

    Game Plan

    In-Depth

    Types of Tax Audits

    In today’s highly regulated business environment, your company can be audited for a variety of reasons. Federal income tax audits may garner most of the attention, but small businesses can experience other types of audits, too.

    Qualified Retirement Plan Audit
    If your organization offers employees a 401(k) plan, 403(b) SIMPLE plan or Simplified Employee Pension (SEP), you must follow certain rules to ensure your company and its employees get only the tax benefits they’re entitled to. The Internal Revenue Service checks on companies periodically to make sure they do.

    A plan audit is one of the more complicated ones, and you don’t necessarily need to make a mistake on your tax returns to trigger one. Inaccurate compliance, reporting or disclosure can all lead your company to run afoul of retirement plan law. Work with a tax attorney and CPA experienced with tax-qualified retirement plans in the event your company’s plan is audited.

    Affordable Care Act Audit
    Compliance with some business aspects of the Affordable Care Act may still be in the future, but expect audits soon that check to make sure your company is complying with this law. Many businesses must offer a minimum level of health insurance to employees or pay a penalty as high as $3,000 per employee, according to accounting firm Ernst & Young.

    The ACA also comes with new reporting requirements and penalties for non-compliance. While penalties for not complying with ACA aren’t exactly taxes, they have a similar impact as taxes on companies.

    Sales Tax Audit
    When your business must pay sales tax, a number of changes in your yearly returns can cause your state to start a sales tax audit. An unusual amount of tax-exempt sales, which is typical for sales to tax-exempt, nonprofit groups, can trigger an audit. Internet commerce is another area of discontent for some state tax departments. Changes such as a store closure or bankruptcy may also trigger an audit.

    At a minimum, small companies may want to use sales tax software to help them keep accurate records and make timely payments. All companies might want to consider consulting professionals with tax and accounting experience in this area.

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    Game Plan

    • The Internal Revenue Service publishes a variety of materials here, including an overview of its retirement plan audit process and other information your company will need during an audit.
    • If you have a question about state taxes your company must pay, contact your appropriate state tax department. Your state may have different departments handling business and sales tax returns.
    • See other sections of this Playbook for information on small business taxes, including Business Tax Basics for Beginners and Understanding Business Taxes.