Tax season can be an enjoyable time for small businesses or a pulse-pounding one – getting a nice refund can be a welcomed feeling, but filling out paperwork can be a dreaded task.
Regardless of one's personal feelings toward this time of year, nobody wants to get audited. This is especially true for a small business owner, who will have to spend money and time sorting out the details with the IRS, even if every financial aspect can be defended.
Unfortunately, an audit isn't exactly predictable. This could happen any year, and the chances go up for business returns – and climb even further the higher the income gets. Therefore, it may be wise to pay attention to a few common signs indicating that an audit could be on its way, and get prepared in the event it does occur.
What could trigger an audit?
There are a number of situations that could land a small business under the careful watch of the IRS, even if the business banking seems mundane and all tax documents appear in order. Due to these risks, it is smart to understand which situations could increase the likelihood of an audit.
According to FOXBusiness, one of the reasons a small business could get selected for an audit is because of a mismatch of income to 1099 totals. The IRS receives a copy of each of these forms every time one is completed. If that final tally doesn't equal the amount displayed on a Schedule C, that will most likely signal an audit. In addition to this common cause, another possible factor could be a yearly income that doesn't line up with the industry standards. For instance, the IRS keeps records of the average expenses to income for all businesses, and if something doesn't seem right during tax season, they'll want to find out why.
While self-preparing returns is common for individuals, this task could be more complicated for small businesses. Therefore, it may be wise to contact appropriate financial services to help with filing. FOXBusiness explained that more complex returns, such as those containing a Schedule C, often contain numerous mistakes when completed independently. So, owners and entrepreneurs should consult their tax advisors before sending the documents off to the IRS.
What to do in the event of an audit
An audit may happen one way or another, even if a small business is totally prepared and took all the proper steps along the way. If this is the case, it can be helpful to know what to expect and be ready in advance.
According to the Washington State Department of Revenue, the first step is to respond quickly to all letters, phone calls and other requests for information. It will only complicate the process if a small business owner isn't willing to cooperate with the government. A third party can also get involved, such as an accountant or a bookkeeper. It may be wise to include an additional professional. When the auditor arrives, they should be provided with a spot to work that is out of the public's eye, and offer them all needed records quickly. Anything kept electronically may be requested in that format.
In addition, the Washington State Department of Revenue added that small business owners who are audited reserve the right to appeal any outcome. This may be prudent if a company is found to owe more money and can't pay right away. The agency that performed the audit can also complete the appeal or offer advice about how to proceed. It is also important to remember that results of an audit can be shared with other local and federal agencies.