Is the IRS Eye on you? If so, are you prepared?

Posted by Biz Central USA Marketing Team on March 31, 2009 under Small Biz and Entrepreneurship | Read the First Comment

So you met the tax deadline and your feeling pretty good, but what happens if the IRS decides to audit you? Will you be prepared? According to IRS officials, the audit rate for small business taxpayers is higher than the overall rate because small businesses tend to have more compliance problems than other taxpayers. How do you know if you are at risk? Really, there is no way of definitively knowing this answer.

The IRS selects returns for examination in five ways: 1)Computer scoring by DIF (discriminate information function), a formula used to select returns for review, 2)National Research Project, 3)Local and national projects that look at particular areas, 4)Information matching, such as Forms 1099, 5)Related returns. If selected, it′s good to know that some audits are worse than others.

 Three Types of Audits:    

• A Correspondence Audit- by mail, asking for a straightforward answer (by mail) on less complicated issues, such as proof of deductions.
• An Office Audit- held in the IRS office, where you′ll be asked to produce receipts and other documents related to specific issues.
• A Field Audit- where the IRS agent comes to your home or place of business.

While tax professionals say it is unlikely the IRS will come knocking at your door, if you are choosen, it′s definitely not a good place to be. After all, audits cost time and money – two things most small business owners have in short supply. Therefor, the best thing to do is be prepared!

Preparing for an Audit:

• Always keep any business-related records including: canceled checks, invoices or sales slips, handwritten notes, receipts or petty cash vouchers showing any payments etc.
• Pinpoint problems backing up income sources or expense deductions. You′ll need to legally show your right to take tax deductions or other tax benefits claimed on your return.
• Retain the service of a professional. Hiring a seasoned professional can make this experience less painful and cost you less in the end.

A IRS audit is nothing to take lightly. Improper bookkeeping and faulty filings can lead to thousands of dollars coming out of your small business. In the end, the more prepared you are, the less likely you will be penalized with hefty fines and the more likely your business will succeed!