Be Proactive About an IRS Audit


One of the many goals business owners have is to avoid an IRS audit at all costs. However, audits happen less frequently than you may think. Audit rates are at a historical low, with only 0.6% of individuals being audited for the 2018 fiscal year. Although this is good news, there is no guarantee that your business won’t be picked for an audit. Businesses, corporations, and high-income individuals are the most likely to find themselves in an audit.

What can get your business on the IRS’ radar

The IRS looks for certain things on a business’ tax return that could lead to an audit. The most common are:

  • Notable inconsistencies between the current and previous years’ tax returns.
  • Large differences in your gross profit margin or expenses and other companies in the same industry.
  • Deductions that are incorrectly calculated or irregularly high.

Deductions like travel and auto expenses are often questioned by the IRS because of their recordkeeping requirements. If your business is structured as a corporation and you have an owner-employee salary that unusually higher or lower than other businesses in your area, this could also get you on the IRS’ radar.

Responding to an audit letter

If you happen to be selected for an audit, don’t panic. You will receive a letter in the mail notifying you of the audit and the discrepancies in consideration. Usually, the IRS will follow up with a phone call if they receive no response from you. It is extremely important to note that the IRS does not contact people by email. If you get an email from an unfamiliar source saying you’ve been chosen for an audit, it is a scam and should be deleted immediately.
The IRS does give you time to prepare and gather your necessary documentation for the audit. They do not require an instantaneous response to a mailed notice. You must organize the information you’ve gathered. If you find that anything is missing, you should provide other documentation to rebuild the missing information. Generally, audits ask that you mail documentation that can prove the deductions you’ve taken. You may be asked to take those documents to your local IRS office. Only a field audit will require meeting with an auditor.
A lot of audits are purely done on routine. Being proactive in painstakingly tracking, documenting, and filing your business’ tax information can help decrease your chances of an audit ever happening, or make it less of a hassle if it does happen.
If your business has been chosen for an audit, contact us. We can help you understand exactly what the IRS is contending (it can be unclear sometimes), gather the necessary documents for a successful audit, and respond to the IRS in the most effective way possible.

CAPATA is a full-service accounting firm located in Laguna Niguel in southern California.