Many business owners ask: How can I avoid or prepare for an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited.  However, overall, audit rates are historically low.

There’s no 100% guarantee that the IRS won’t select you for an audit. This is because they choose some of the tax returns randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. It also helps to know what might catch the attention of the IRS, as well as what to expect during an IRS audit.

Audit Red Flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:

• Significant inconsistencies between previous years’ filings and your most current filing.
• Gross profit margin or expenses markedly different from those of other businesses in your industry.
• Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict record-keeping requirements for them. For example, tax deductions for travel expenses. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye. This is especially true if the structure of the business is setup as a corporation.

How To Respond

If the IRS decided to select you for an audit, they will notify you by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many small business audit requirements simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. They will inform you of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our accounting CPA firm can help you:

• Understand what the IRS is disputing (it’s not always crystal clear).
• Gather the specific documents and information needed.
• Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t panic if you have been in contact with the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.