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Four reasons why an IRS Audit isn’t the end of your business

Image via Flickr by reynermedia

It’s nearly that time of year when businesses need to complete their annual Internal Revenue Service (IRS) tax returns. The IRS may decide to audit your tax return, and there seems to be a general negative association surrounding audits and how it means a business will be shut down. This is definitely not the case, and you can rest assured knowing that the IRS audits for a number of reasons.

An audit isn’t always a sign of wrongdoing 

The IRS recognises two main categories of business income. The first category is “illegal source” fraud which involves money from criminal or black market sources. The second is “legal source” fraud, which involves using tax-avoidance schemes to conceal legal income or inflate deductions.

It’s unlikely that the government will shut down a business for fraud, but what they will do is impose penalties of up to 75 per cent of the unpaid taxes. IRS auditors recognise that sometimes small businesses are mis-sold services by investment advisors who claim businesses can hide their money. Auditors also know that accountants are only human and can sometimes make mistakes. If a fraud is a genuine error, the penalties are significantly lower and you won’t get a criminal record.

 Inconsistencies in financial information

It’s worth noting that when you meet with an IRS auditor, they won’t just examine your tax return, but they will also examine you as a person. During the interview they will assess your dress, jewellery, car, and office/home furnishings to see whether you fit the income reported on the tax return. If you have declared low revenue but seem to be living a lavish lifestyle, then they are more likely to delve deeper into the investigation.

Unreported income and overstated deductions

IRS auditors are well-trained in finding exactly where money has come in and been paid out. You will be given the reason(s) why you’re being audited, and are required to provide evidence for these reasons only. Do some research on what counts as a deduction or expense, and ensure that you bring receipts, tickets, appointment confirmations, appointment books and diaries. The more evidence you have to back yourself up, the easier it will be for the auditor to determine any fines and penalties.

Utilize a tax professional

If you are finding it difficult to deal with tax-related issues, it could be a good idea to seek assistance from financial experts who can help you achieve a better outcome. Attending an IRS audit interview can be a daunting experience because the auditors can sometimes ask questions that put you on the spot. Hiring a professional to speak on your behalf means they will be able to calculate all figures and explain exactly where they came from. It can put you in much better stead for defending the business in front of the IRS.

Remember that audits are a protocol required by the government, and they have a certain quota of audits to do. An IRS audit definitely isn’t the end of your business and doesn’t make you a fraudster. Stay calm, give yourself plenty of time to prepare, and provide everything that’s required.


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