How to Handle Tax Audits of Your Small Business

It’s tax season, so owners of small cleaning companies are preparing their records in preparation for filing. Although Internal Revenue Service (IRS) audits are on the decline, small and midsize businesses are still at risk, with math errors and dubious expense categories among the most common triggers for an audit.

If your business is targeted for an IRS audit, you need to take the matter seriously without panicking.  Keep in mind that the IRS looks more closely at small businesses that file a Schedule C than larger companies that file their business tax returns as an S corporation or partnership, reports Business News Daily. If your small business reported a loss, rounded up or down its expenses so they all end in zero, or has one extremely high expense compared to revenue, these are red flags that are likely to trigger an audit.

If you receive an audit notice, follow these four tips to help the auditing process go smoothly and minimize any negative impact on your business:

1. Review the audit letter carefully and make sure you understand what information the IRS needs from you. If you don’t have a designated financial advisor, hire an accountant or tax attorney to go through the audit letter with you and identify the issues the IRS has flagged. Do not ignore the letter or delay action.
2. Organize your records before you and your tax professional respond to the IRS or meet with an auditor, This includes receipts and invoices for income and expenses, bank statements and canceled checks, accounting books and ledgers, hard copies of tax-prep data, and leases or titles for business property.
3. Answer the auditor’s questions in a straightforward manner, but don’t volunteer extra information. Providing unneeded or unasked-for information may lead to more questions and additional issues.
4. Do not get defensive or hostile during meetings with IRS agents. Keep your tax professional involved throughout the process. Consider giving the IRS a signed power-of-attorney agreement that allows the IRS to deal directly with your tax professional.