What is a small business IRS audit?
5 min read
January 12, 2021 • Block Advisors
Running a business means you’ve got plenty on your mind. But what about audit worries for your small business? A small business IRS audit means the IRS examines your tax return to verify the accuracy of your income, deductions, or credits. A business tax audit could cover one or more items on your return, or the entire return. While it’s unlikely your business could face an IRS audit, there’s a possibility of it.
Read on for more insight into small business tax audit triggers, the types of small business audits, and what to do if you face an audit—and how Block Advisors can help.
Small business tax audit triggers
Learning how to avoid an audit for small business is an important step to take to stay in the clear from any small business audits. The IRS may examine a tax return when one or more items appear to be incorrect and require further scrutiny. The IRS may also select a return for audit at random.
Some small business tax audit triggers include if:
- You are a cash-based small business owner who reports a substantial net loss on a Schedule C
- You have large business write-offs for your automobile, entertainment, business travel expenses, and food—especially if the amount seems too high for the business or profession
- You report income information that doesn’t match your payee statements (like W-2s or 1099s)
- Your small business tax deductions are disproportionately large to your business’ income
- Your small business runs at a loss for several consecutive years
- Your small business’s charitable non-cash donations are over $500 and are disproportionate to your business’ overall taxable income
Are there different types of small business tax audits?
Yes, there are three primary types of business tax audits: mail, in-person, or field audits at your place of business. Here are the details of each:
1. Audits via mail
A mail audit is the most common type of IRS examination. It doesn’t require you to meet with an IRS representative or auditor in person.
Although the IRS may have a question about your return without conducting a full-blown audit, audits may be conducted by mail. With a mail audit, the IRS will send you a notice or letter asking for additional documentation to prove various items you report on your tax return.
The IRS’s matching program may find missing income that you did not report on your return, such as income reported to the IRS by a third party on Form 1099. You may respond by mail or call the phone number on the notice to discuss or explain the matter. In some cases, submitting sufficient documentation will close the audit if the IRS is satisfied.
Find other reasons why you might get an IRS letter.
2. In-person audits
An office audit or interview is an in-person audit that takes place at a regional IRS office. In-person audits are more in-depth than mail audits and sometimes broader in scope. You will be asked to bring information to an in-person audit, including your small business’s financial records, bank statements, receipts, as well as tax returns and records.
3. Field audits
A field audit, which is the most lengthy and complex type of audit, may be conducted at your place of business.
No matter what type of audit the IRS conducts, you will first get a notification by mail, never by phone or email. Don’t ignore the notice! Be sure to respond to the notice or to contact your tax professional, if you used one, with plenty of time to respond.
There are also random audits, which aren’t triggered by any particular action.
Block Advisors can help with your business audit: The IRS audit process for small business differs based on the type of audit. If you’re facing a business tax audit or want help from a small business tax pro, let Block Advisors help. View more information about our Small Business Tax Audit Services.
What are possible outcomes of a small business audit?
There are several outcomes of a small business audit:
- If the IRS is satisfied with your explanations and the documentation you provide, then no further action is necessary. This applies to mail and in-person audits.
- If the IRS proposes changes to your tax return, you can either agree and accept the changes or challenge the assessment. If you agree, you will sign an examination report or other form provided by the IRS and establish a payment arrangement.
- If you disagree with the IRS’s findings, you can set up a conference with the examiner’s supervisor to further review your case or you can request a formal appeals conference.
More guidance on business tax audits
Navigating the IRS while still managing your day-to-day small business tasks can be daunting. Block Advisors certified small business tax pros can help.
If you find your business facing an audit, our team can communicate regularly with the IRS on your behalf—They know the steps to take to resolve the matter and get the best outcome. In fact, they may:
- Help you file any missing returns, if necessary
- Prevent or minimize additional tax assessments
- Reduce or even eliminate any tax, penalties, and/or interest owed
- Obtain the best possible payment arrangements on any balance owed
Our pros can help to resolve a broad range of tax problems— from the simple to the complex, including small business audits, penalties, collection problems, and other tax account issues. Whether you want more guidance on the average cost of an audit for a small business or want hands-on help from a trusted tax pro, let us guide you.
*Please note, Block Advisors does not provide legal representation for its clients.
*Terms and conditions for Business Tax Audit Support apply. H&R Block does not provide legal representation. Business tax audit support does not include reimbursement of any taxes, penalties, or interest imposed by tax authorities.”