AZHARI LLC BLOG

Dec. 11 2024

What to Do When Your Small Business is Audited

Posted By: azhari dev

Category:

Tax Fraud

The word audit makes any small business owner sweat. But don’t freak out. An IRS audit doesn’t have to be the end of the world. It’s like an unwanted guest at a party—awkward and uncomfortable—but with the right approach, it doesn’t have to ruin your business. By following these steps, you can face the audit head-on, avoid mistakes and protect your business from long-term damage. Here’s what to do when your small business is audited.

What is an IRS Tax Audit?

A tax audit is the IRS’s way of checking your business’s tax returns. Audits can seem scary but they’re not always because of bad behavior. Sometimes, they happen because of random selection or discrepancies in your tax filings.

Common Audit Triggers

While audits are sometimes random, some things can trigger the IRS’s attention:

Audit Trigger	Why It May Trigger an Audit
Unreported Income	If your income doesn’t match what’s reported by third parties, like vendors.
High Deductions	Large deductions compared to your income might appear suspicious.
Inconsistent Information	Mistakes or mismatched data on tax forms can lead to an audit.

Knowing what can trigger an audit will help you be better prepared.

1. Stay Calm and Organized

When you find out you’re being audited, the first thing you should do is stay calm. Panicking will only make it worse. The best defense is a well-organized business.

Gather All Your Records

Financial Statements: Have your income and expense reports ready. This includes bank statements, sales records and tax filings.
Receipts and Invoices: The IRS will want to see proof of your expenses. The more detailed and organized your records are, the easier it will be for you to respond.

If you’ve been keeping your records in order, you’re already ahead of the game.

2. Work with a Tax Fraud Attorney

A tax fraud attorney can be your best friend during an IRS audit. They know the tax law and will help you avoid costly mistakes.

Why a Lawyer Is Important

They Know the Law: Tax fraud lawyers know the IRS audit process and will guide you through it without getting you caught in the common pitfalls.
Representation: Your lawyer will handle communication with the IRS, so you don’t have to. This will protect you from making mistakes or providing incorrect information.
Negotiation: If the audit results in fines or penalties, a lawyer can negotiate a better deal and reduce the overall cost.

3. Respond to IRS Requests Quickly

Not responding to the IRS or missing deadlines is one of the worst things you can do during an audit. It will create unnecessary delays and increase the risk of penalties.

How to Respond

Read the Audit Notice: The IRS will send you a formal notice about the audit. Read it carefully and make sure you understand what documents they need.
Meet the Deadline: The IRS will give you a deadline to respond. Missing this deadline will incur additional penalties, so make sure to get everything in on time.
Ask Questions: If something is unclear in the audit notice, don’t hesitate to ask the IRS for clarification. The more you know, the better your response will be.

4. Be Truthful and Transparent

It’s tempting to “fudge” the numbers, especially if you’re worried about certain areas of your tax filings. However, being dishonest during an audit is one of the fastest ways to get yourself into legal trouble.

What Happens If You’re Not Truthful?

Penalties and Fines: The IRS can impose big fines for falsifying information. If it’s determined you intentionally provided false information, the penalties will be even bigger.
Criminal Charges: In extreme cases, tax fraud can lead to criminal charges. If you’re caught hiding income or overstating deductions, you could be in serious trouble.

Stick to the facts and don’t try to “cover-up” any mistakes. If you made a mistake, own up to it and move on.

5. Know the Audit Process

The IRS will follow a process when they audit. Knowing what to expect will make it much less painful.

The Audit Process

Step of Audit Process	What to Expect
Initial Contact	The IRS will notify you in writing about the audit.
Review of Documentation	They will ask for documents that back up your tax return.
Interview	In some cases, you might have to meet with an IRS agent.
Audit Conclusion	The IRS will either find no issues, make adjustments, or issue penalties.

6. Fix Mistakes Now

If the audit finds mistakes, fix them now. The IRS is more lenient if you show you’re cooperating and addressing the issues.

How to Fix Mistakes

File Amended Returns: If the audit shows you made a mistake on your tax return, you may need to file an amended return.
Pay Additional Taxes: If the audit finds you owe more taxes, paying as soon as possible will help avoid further penalties and interest.

7. Negotiate or Appeal the Audit Results

If the audit results in penalties or adjustments you don’t agree with, you can appeal. The IRS has an appeals process where you can make your case.

How to Appeal

Request a Meeting: You can request a meeting with the IRS Appeals Office to make your case.
Provide Supporting Evidence: If you disagree with the findings, make sure to provide additional documents or explanations to support your position.

If you need help with the appeals process, a tax fraud lawyer can represent you and give you a fair hearing.

8. Avoid Future Audits

Once the audit is over, it’s time to take steps to avoid future audits. While you can’t control everything, there are certain things you can do to reduce the chances of another audit.

Best Practices for Future Tax Filings

Hire an Accountant: Having an accountant review your taxes will catch any potential issues before you file.
Stay Organized Year-Round: Good record-keeping all year makes tax time much easier.
Consider Tax Insurance: Some businesses get tax insurance to protect themselves from future audits and the costs associated with them.

Protect Your Small Business During an Audit

An IRS audit is a headache you’d rather avoid, but with the right steps, you can handle it calmly and efficiently. Stay organized, work with a tax fraud lawyer and follow the process to protect your business. If you’re unsure, reach out to Azhari LLC for help – you don’t have to go through it alone.