Quick Summary
Tax audit is a phrase that sends shivers down the spines of even the toughest business owners, but an audit needn’t be scary. There’s little to fear if you keep detailed records of your business income and expenses, understand what an audit involves and know your rights. A detailed approach to preparing for a tax audit and the aid of a tax professional can help you ace any audit that comes your way.

Prepping for an Audit: Document Everything

The best time to prepare for an audit is before you ever have one. Always keep an accurate record of all your income and expenses, including dates and amounts. Document the “why” behind some expenses, such as travel and entertainment. Holding your tax-related documents from two to six years is usually long enough to satisfy income tax auditors. Only audits alleging fraudulent returns involve documents that your business must keep indefinitely.

Tax Audit Triggers

Sometimes, the Internal Revenue Service chooses companies at random for a tax audit. However, a big drop-off in business, bankruptcy, branch closings and out-of-the-blue expenses can trigger IRS alarms – and a tax audit. When you know that your current income or expenses will differ significantly from what was recorded on previous returns, expect at least the potential for a tax audit. You have nothing to fear if your company is above board and keeps great records.

Types of Tax Audits

Federal income tax audits may occupy the imagination (and reality) of business owners, but companies are audited for other reasons and by other tax authorities. State and local income taxes, sales taxes, employer-provided health insurance and company 401(k) plans can all trigger audits that require comprehensive documentation and your time. Document everything relating to these areas, just as you document and maintain federal income tax records.

The IRS Is Auditing Your Company. Now What?

The taxman cometh in different ways, from a simple letter audit to clear up a few tax discrepancies to an all-out review of everything on your company’s past few tax returns. If you’re uncomfortable representing yourself, consider hiring a qualified tax professional. When asked for information, provide only that information. And understand your rights. You may request a delay if needed, and you don’t have to conduct a meeting with the IRS in your own home or place of business. You can instead choose a neutral site, such as your CPA’s office.
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