Top 5 Things to Know About Audits for Your Business

Most small business owners feel shivers when they hear the word audit. Audits can be time-consuming, costly, and a burden.

Business Audit Truths

But a better understanding of audits may reduce concerns or, if necessary, help to handle them more easily.

1. The chances of being audited are very low.

The 2020 IRS Data Book provides statistics about IRS audit activities in the previous fiscal year (September 30, 2019 through October 1, 2020), and only 0.1% of S-corporations were audited. Even lower was the percentage for partnerships. Only 0.3% was the rate for C corporations with balance sheets of $5 million. Schedule C filers do not have separate statistics.

The IRS wants budget increases to increase audits. However, it is not clear how much audit risk will be increased in the future. Late last year, the IRS announced that it would double the number of audits for small businesses in 2021 to 50%. It is still a small percentage.
Also read: Get Rich Quick? 30 Best Money Making Apps To Turn Your Spare Time Into Cash

2. Partnerships or partners? Who gets audited?

A special audit regime called the BBA Centralized Partnership Audit Regime audits partnerships. Limited liability companies and limited liability companies that file partnership returns are also audited at an entity level. The partnership handles any owed amounts and makes adjustments to the small business returns.

This audit regime can be opted out by “small partnerships”, which are those with 100 or less partnerships and all members of the following: individuals, corporations, S corporations, estates, deceased partners, foreign entities, C corporations, and S corporations. The IRS will audit the partner if the election is made to see how the partnership item was treated.

3. If selected for audit, you have rights

An audit may be requested for you for any number of reasons. You can quickly settle if you agree to the audit. It may take the form of a simple correspondence audit.

However, if you disagree with the IRS’ position and wish to challenge it, you have certain rights. You have the right to be presented by a tax professional and to receive courteous service. You must also comply with information requests and provide it in a timely fashion. For more information about your rights, see IRS Publication 554.
Also read: iPhone 14 Pro Max Is Apple’s New iPhone To Be Launched In September (Know The Release Date, Specification, Rumour & More)

4. The initial audit isn’t the final answer

You have the right to appeal against audit results. First, appeal to the IRS. You may request a small case if the IRS has deemed the amount owed to you (taxes and interest plus penalties) less than $25,000 You will need to file a formal protest if the total amount owed by the IRS (taxes, interest and penalties) is less than $25,000

Publication 5 provides more information about your appeal rights and how you can protest the IRS if it doesn’t agree with you.

5. The IRS doesn’t have the last word

You can appeal an IRS decision about your return if you feel you are wrong. The IRS doesn’t require you to pay the amount they say you owe. You can instead bring the matter before the Tax Court. Within 90 days after the IRS notice of deficit is mailed, you must file.

A small Tax Court procedure can be used if the outstanding amount is less than $50,000. (See Title XVII to learn more). You can appeal the court’s decision but this procedure is less expensive and takes much faster.

For more information on filing a tax court petition, the IRS offers additional assistance.

You can also choose to pay the amount owed and seek a refund from a U.S. Federal Claims Court or U.S. District Court.
Also read: Costco Gas Hours: Know Everything Including Holidays, Saturdays, & Sundays In 2024

Final thoughts

The best defense against being audited is to handle things properly from the start. Report income correctly, claim only deductions and credits to which you are entitled (and have supporting documentation) and file on time (including applicable extensions).

If you do come under audit, you may go it alone (“pro se”), but it’s also highly advisable to consult with a tax professional. This will help you determine the best course of action and may wind up saving you those ever-present concerns…time and money.