Why your Small Business may be at Greater Risk for an Audit!

It is one of the most heart-wrenching words that a small business owner can hear: "OFFICIAL NOTICE! You are being audited by the IRS."  By this time your heart has sunk down to the bottom-most part of your body and you are sweating profusely.  Questions are now spinning in your mind- "I have done everything right, why am I being audited?", "I thought I filed everything correctly, did I do something wrong?", "Why are they picking on me, I barely have any funds as it is!"  The truth is, whether did or didn't do anything, as a small business you may be at higher risk for an audit!

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 by chance your business is selected for an audit, 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 chosen, 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. Therefore, the best thing to do is be prepared!

Even before warning of an audit, it is always smart to keep any business-related records including: canceled checks, invoices or sales slips, handwritten notes, receipts or petty cash vouchers showing any payments etc.  So, if it at anytime you are subject to an audit, you will already have all the appropriate files, paperwork and bookkeeping.

Pinpointing problems backing up income sources or expense deductions will also help when going through an audit.  You′ll need to legally show your right to take tax deductions or other tax benefits claimed on your return.  Not only will the auditor possibly recognize you efforts, this may help you find problem areas in you finance reporting etc.  

Finally, retain the service of a professional. Hiring a seasoned professional can make an audit experience less painful and cost you less in the end.

In conclusion, an 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!