No company wants to face a tax audit. It is a highly time-consuming and costly process that can potentially hurt a business.
There is no sure way to make your company completely audit-proof as the IRS often selects audit targets at random. However, you can take steps to ensure that any potential audit causes as little disturbance as possible.
1: Keep detailed records
When the IRS audits a business it asks for several documents. Among the most important are:
- Receipts
- Bills
- Legal papers
- Logs or diaries
- Employment documents
- Schedule K-1 (for S Corporations)
The IRS usually asks for records from the past three years upon request, but sometimes it could ask for previous years’ documents if they encounter a problem. Additionally, it is indispensable to organize all your documents by year and by type of income or expense. Digitizing these documents may save you a great deal of difficulty in the future.
2: Watch out for mistakes
Take some time to review your current tax information. There might be some mistakes in your records or information you might have omitted. Some of the three most common errors are:
- There are personal expenses in your records that are categorized under business expenses
- You omitted any income in your records (even small amounts)
- There are math errors and wrong numbers in your figures
3: Choose a representative
The primary responsibility of the representative will be to settle the audit with the IRS and serve as a designated individual during a tax examination. The representative can be only one person, and they must be either enrolled agents by the IRS, certified public accountants and attorneys.
As a final point, audits are increasingly rare for successful companies. But relative rarity does not mean your company will not face an audit. However, if your business has paid taxes on time and your numbers make sense, then there is little to fear from one.