You found out your business is getting audited. The first thing to check is whether it is a real audit. The IRS always initiates audits by mail. If you get a phone call or an email, it is a fraud.
Even if you have confirmed it is a legitimate audit, it does not mean you have done anything wrong. Sometimes you will get a “related examination,” when your returns involve issues with other taxpayers whose returns were selected for an audit. Other times it may be completely random; you are selected based solely on a statistical formula.
The IRS will handle your audit through the mail or with an in-person interview to review your records. The interview may be at an IRS office, your home, place of business, or your accountant’s office. Remember, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you receive.
The IRS may request certain specific documents. For a business, these may include such employment documents as uniform policies or dress codes, continued education requirements, W-2 reimbursement statements, and Schedule K-1. The IRS accepts some electronic records that are produced by tax software, which it may request in lieu of or in addition to other types of records. The auditor will let you know what is acceptable.
Note that the law requires you to keep all records you used to prepare your tax return for at least three years from the date the tax return was filed. Generally, the IRS says it will include returns filed within the past three years in an audit. However, if it identifies a substantial error, it may add additional years, but rarely more than six.
Here is what you have the right to expect:
- Professional and courteous treatment by IRS employees.
- Privacy and confidentiality about tax matters.
- Knowledge about why the IRS is asking for information, how the IRS will use it, and what will happen if the requested information is not provided.
- Representation, by oneself or an authorized representative.
- The right to appeal disagreements, both within the IRS and before the courts.
How will the audit end?
An audit will end in one of three ways:
- No change: You substantiated all the items being reviewed and it resulted in no changes.
- Agreed: The IRS proposes changes and you understand and agree with the changes.
- Disagreed: The IRS proposes changes and you understand but disagree with the changes.
Your best bet is to work closely with a qualified tax professional from the moment you get the notice to the ultimate resolution. This is the best way to ensure the audit goes as quickly and as painlessly as possible.