A small business audit doesn’t necessarily mean you’ll be dealing with the Internal Revenue Service. Small business owners can conduct internal audits on an annual basis. Either way, the audit process involves examining accounting records and tax return numbers. The idea is to make sure your financial data is correct and compliant with tax law.
What is a small business audit?
This is an examination of small business tax returns and financial records. The idea is to make sure everything is accurate. The accounting books and financial statements are reviewed by either external auditors or internal auditors.
Keep in mind that you must report things like a foreign bank account to the IRS.
Why are businesses audited?
The IRS conducts small business audits for a variety of reasons. Here are some of the common ways a business owner can find themselves in front of an IRS agent.
- Claim 100% of business use in a personal vehicle.
- Claiming too many consecutive business losses.
- Rounding of financial information numbers.
- Other bad financial practices such as discounting.
- A small business income that is higher than average may trigger an audit notice. However, the chances are not high that you will end up in an IRS office for this.
Benefits of a Business Audit
Business audits serve many useful purposes. Some companies must review financial statements to comply with regulations. Others must have an accounting firm perform financial records to maintain efficiency. Here are some good reasons why most audits are beneficial.
- Fraud Disclosure: An auditor checks for different types of fraud. Eliminating this is important for the sole proprietorship and/or public companysmall. It’s also a good way to uncover employee theft. Risk factors include multiple employees participating in the program.
- Boost efficiency: Regular audits can highlight unnecessary processes and practices. The audit process may result in recommendations for streamlining and improving processes.
- Controls provide compliance: There are legal obligations in every industry. Small businesses that face non-compliance issues can lose customers and face heavy fines. Audit reports are important for matching compliance with statutory obligations. A statistical formula for calculating a sample size is a good place to start.
- Audits provide better budgets: An external audit can review business tax returns, personal tax returns and bank statements. Even an internal audit can help business owners budget better. All liabilities, assets, expenses and various types of income are included. The audit process can help highlight where a business’s finances can be improved. Of course a better budget follows.
- Audits can help a small business get financed. Business owners usually think about growth. External audits can help your business ask investors or banks to provide funding. A line of credit can help you take your business to the next level.
- Audits highlight bad practices. These can help your business identify internal controls and audit practices that need to be changed. Amending any problems makes tax time less complicated.
What are the types of business audit?
A small business audit can take many different forms. You will need to bring together your financial statements and receipts and loan agreements for each of the following:
As the name suggests an internal audit takes place in your business. These internal controls are done by individuals or a group. They look at financial statements, policy compliance and operational concerns to name a few areas.
This is an IRS audit. A tax professional will review a tax return to make sure it is accurate. An IRS auditor will review the companies’ financial records. These types of small business audits do not always indicate illegal activity. An IRS audit like this is selected based on several indicators.
HR professionals in a company conduct this type of internal audit. These are about employee information and ensuring they are paid correctly.
These are technical checks that are part of civil or criminal investigations. These external controls may include an anti-fraud service. The results can be used as evidence.
These focus on the financial records of a small business. Specific documents are used that highlight assets, investments, income and expenses. It won’t hurt to know the 1099 rules to make sure you file any additional income.
These are IRS audits conducted by phone or mail. They are looking for additional tax information about a specific topic or item. It is one of the least stringent types of tax audits. Mail audits often focus on non-profit and charitable organizations.
This is another type of IRS audit. These can take place in your accountant’s office, your business or even your home. On-site inspections are in-depth and comprehensive.
What is included in a business audit?
Whether you are considering an IRS audit, an internal audit, or another type from a tax professional, you should know the records that will be required. The following can help make the whole process smooth. This is only a partial list of some of the financial documents you may need to present.
Documents detailing theft or losses
If there is damage to a business, an IRS audit may request photos. You need copies of police reports if there is no insurance.
These types of business expenses include organizational and individual names of the people paid. An external audit will also want to see the dates you paid them. Plus the type of service.
IRS audits will want to see how you relate to your business. The audit process takes into account the money paid and received. In addition, mileage under certain conditions.
An inspector will want to see a copy of the original loan with the location of the property. The amount borrowed and the terms should also be included. Be sure to include an analysis of how the money was used for an outside auditor.
Independent contractors can put them on an audit report. They must be labeled with the business purpose of the trip. Organizing these files will help speed up any type of audit.
How to prepare for a business audit
There are a few other things you should do to prepare for an audit. You can’t completely avoid one of them. However, there are a few things you can do to prepare.
- Keep accurate records. Please note that electronic files are usually acceptable. However, if you can’t find your papers, even a valid expense can be rejected.
- An audit for a tax matter becomes more serious if your records are terrible. If you need help or have deducted expenses you shouldn’t have or lost income, call a tax attorney.
Remember, there are different types of checks. When you get a notice from an IRS manager wanting to look at your books, here’s what to do.
IRS Business Audit Process
These types of checks don’t have to be stressful. This type of check will check your business information to make sure it is accurate. The IRS may select your business at random or through screening. These occur when your business is involved with someone who has been audited.
Other triggers include overspending and misclassification of workers.
- The process begins with a letter outlining the documents and records needed.
- These records are reviewed by IRS agents.
- There is a closing and examination report on the phone.
- The IRS will let you know if you owe money, penalties and interest.
- They close the case if you agree to a closing letter.
What are generally accepted accounting principles?
These are standards for corporate and business accounting. The Financial Accounting Standards Board (FASB) uses GAAP as a basis for practices and methods.
What financial statements are needed for an audit?
These controls must include specific statements. These include an income statement, a balance sheet and a cash flow statement.
Who can request a business audit?
An external audit can be requested by a few different entities. Such as the IRS, a tax agency or insurance company, even a third party.
Why should you conduct an independent business audit?
It’s always a good idea to take another look at your numbers. It’s a particularly positive move when you’re looking for investors. The independent audit process strengthens your credibility.
An independent business audit is a good idea when looking for a loan. And when you’re looking to sell a business.
What are your rights during an IRS audit of your business?
Knowing your small business rights through an IRS audit helps. Here are just a few of the things businesses and taxpayers need to know.
- You have the right to representation. This may include a tax attorney or a chartered accountant.
- You are only entitled to pay the amount of tax owed.
- You can file a tax appeal within 30 days of receiving the decision.
You also have the right to courteous and professional service from IRS employees.
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