If you’re a business owner who recently filed your 2016 income tax return, rather than an extension, you may now be wondering whether it’s likely your business could be audited by the IRS based on your filing. Here’s what every business owner should know to be prepared for the process.
How Your Business Could Trigger an IRS Audit
Business audits typically occur randomly, but certain tax-return-related items are more likely to raise red flags that may lead to an audit with the IRS than others. 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.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

IRS Audit Response Times
If you’re selected for an audit, you’ll be notified 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.

The good news is many audits simply request 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 field audit, most severe version, requires meeting with one or more IRS auditors.

In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, 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.

Equip Your Business with an Experienced Advisor
If the IRS selects you for an audit, considering contacting your advisor or an accountant at a certified public accounting firm. An advisor can help you understand what the IRS is disputing, gather the specific documents and information needed, and respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year, whether it’s this year, next year, or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you can make an audit much less painful and even decrease the chances that one happens in the first place.