You have probably heard that famous quote that the best way to prepare for a tax audit is not to be audited at all. But since we are all human, we are prone mistakes. In order to avoid an audit, you should avoid the tendency of most people who try to be very accurate and complete with the business income tax returns.
Types of IRS Audits
The IRS performs three different kinds of tax audits including:
1. Correspondence audits – This is carried out with a letter. With this type of audit, the IRS inquires for the verification or error correction or any other added documentation.
2. Office audits – This is where a taxpayer is summoned to an IRS office why tagging along with all relevant documentation.
3. Field audit – This is where the IRS visits the taxpayer in their area of business. With this type of audit, it is more comprehensive with the IRS requesting forms, previous last year tax returns, documents within certain limits.
Limits for Audits and Collections
The IRS is authorized to audit any business or personal tax return within three years of filling it. It is also legible to collect the taxes back which are owed up for 10 years. In case of a 2019 audit for a return filed in 2016 has issues in a return filed between 2009 and 2019, it is legible to collect taxes with all the relates returns.
There are exceptions on the limits which are placed on the audits and collections which are made by the IRS for cases of tax evasion, filing no return or even filing a false returns. There are other exceptions as per the IRS Section 6501.
Important Notes on Preparing Your Business for a Tax Audit
An audit is important in the case that your business has received an audit notification from the IRS. Upon receiving a formal audit request, it is recommended to contact a tax preparer or advisor before responding. The fact that you have received a sample letter of request from the IRS can be an indication of a problem with your tax returns.
Therefore, you should always review the request with a professional to help you in creating the response. This will cost you an added funds to take care of a tax attorney but it is important in saving you from additional issues.
You should also ensure that you have a record in order. For IRS auditors, they can impose penalties for your business in case of poor record keeping. Therefore, you need a good record-keeping system for income, expenses and pension plans on a yearly basis.
You should also ensure that all relevant records can be availed. You can also file a request form from banks and credit card vendors for information. It is important not to make the documents in case they are not available.
You should make an effort to ensure you have reconstructed your lost or destroyed records. In case of any incident happening in your business, you should have a file backup plan for all available records.