If your business is being audited by the Internal Revenue Service (IRS), turn to Regal Tax & Law Group, PC. Our experienced San Francisco tax attorneys know how to handle an IRS business audit for a wide range of small businesses, including realtors, investors, cannabis operators and construction tradespeople. We have a working knowledge of the federal tax laws and a proven history of helping our clients avoid tax penalties.
Although the prospect of the IRS auditing your business taxes is frightening, we can help you prepare for and pass the audit. For over 10 years, we have provided small business owners with informed representation and trustworthy advice. When you become our client, you can rest assured that we will be by your side before, during, and after your IRS business audit. Please contact our office today for a complimentary consultation with one of our tax lawyers.
What is an IRS Business Audit?
The purpose of an IRS audit is to review your business’s accounts and financial records to determine whether you reported all income and took only allowable deductions. IRS audits can be conducted by mail (correspondence audits), however, the agency does most business audits in person, which are known as field audits.
During an IRS audit, the auditor will examine whether your business has reported taxable income, losses, expenses and deductions according to federal tax laws. In particular, the auditor will compare your business tax return for the year in question with the business’s books for that tax year.
You will be required to gather and provide financial information requested by the auditor, such as your:
- Balance sheet
- Profit and loss statement
- Source documents (e.g. invoices, receipts, bank statements)
- Other bookkeeping documents.
Additionally, you must provide in-depth answers to questions the auditor raises about your business’s finances and explain your accounting and record-keeping systems.
The auditor’s role is to ensure that there are no errors on your business tax return for the audited year. It is imperative that you cooperate with the auditor and treat him or her with professional courtesy at all times. Even better is to have a skilled tax lawyer by your side who can act as your intermediary, to make certain that the IRS plays fairly, and advocate for your tax position.
Many IRS business audits are initiated within a year after a return is filed and are usually completed in less than a year. If you have received an audit notice from the IRS, you should seek legal counsel as soon as possible.
Tax Audit Triggers
According to the 2019 IRS Data Book, only a small percentage of small businesses are audited each year, however, there are several common audit triggers, including:
- Underreporting cash transactions — If your small business receives a lot of cash (e.g. restaurants, bars, hair salons, retailers, convenience stores), all cash payments received must be reported as income. Additionally, credit card processors and third party payment processors such as PayPal report transactions your business processed for the year on Form 1099-k. The IRS relies on a complicated formula to calculate how much cash sales your business should have produced, as well as net profit margin ratios, to determine whether you accurately reported expenses. If your reported cash sales are lower than the IRS’ projected figure, your small business will likely be audited.
- Claiming business losses year after year — There may be times when your expenses outpace your income, however, claiming business losses year after year will trigger an IRS audit. The agency may determine that your business is taking improper deductions to avoid reporting income. In fact, the IRS may find that your business is a hobby, remove the loss from the tax year under audit, as well as losses from previous years, leaving you with a large tax bill. Ultimately you must be able to prove that your business is legitimate by providing records that justify your deductions.
- Improperly classifying workers — It is permissible for your small business to rely on independent contractors to reduce your employment expenses (e.g. FICA, Medicare taxes, insurance benefits; however, misclassifying workers to avoid payment taxes could trigger an IRS audit, particularly if your tax return shows multiple 1099s issued to workers.
- Combining business and personal expenses — While it is permissible to minimize your small business’s tax liability by claiming deductions for expenses related to operating costs, personal expenses cannot be included in those calculations. The IRS has standards for what qualifies as a business expense; deductions most often miscategorized include meals, entertainment, travel and car use. It is critically important to maintain detailed records that show expenses were for legitimate business purposes.
- Errors/mistakes — Even simple mistakes can be problematic on a small business tax return: mathematical errors (adding or subtracting incorrectly), misplacing a decimal point, or missing schedules or documentation can skew your actual tax liability, opening the door to an IRS business audit.
While the foregoing factors increase your chances of being audited, most IRS audits are random compliance checks the agency conducts each year. In any event, the best way to handle an IRS business audit is to enlist the services of an experienced IRS tax attorney.
How Regal Tax & Law Group, PC, Can Help
When you become our client, our legal team will:
- Help you compile and review the requested business and financial information
- Guide you through the audit
- Communicate with the IRS on your behalf
If the IRS assesses a tax penalty against your business, we will explore all your options, including filing an appeal with the IRS Office of Appeals or negotiating a settlement with the IRS.
Above all, we will handle your business tax and financial information in confidence and provide you with the highest level of legal protection. If you are facing an IRS business audit, don’t delay. Contact our tax lawyers today.