How To Prepare For An IRS Audit: Legal And Financial Steps For Businesses

An IRS audit can be a daunting experience for any business owner, but with the right preparation, you can navigate the process with confidence. Whether your business is facing a routine examination or an in-depth audit, knowing how to respond and protect your interests is essential. Here are some tips from the experienced professionals at Bosshard Parke in La Crosse and Sparta, Wisconsin.

What Triggers An IRS Audit?

The IRS selects businesses for audits based on certain red flags or randomly through statistical methods. Common triggers include:

• Discrepancies in reported income and expenses.
• Excessive deductions that deviate from industry norms.
• Frequent reporting of losses.
• Large cash transactions flagged by financial institutions.

Understanding these triggers can help you avoid errors and prepare for potential scrutiny.

Steps To Prepare For An IRS Audit On Your Business

1. Organize Your Financial Records

The first step to prepare for an IRS audit is to ensure your financial records are in order. This includes:

• Income Statements and Receipts: Verify that all income is reported accurately.
• Expense Documentation: Gather receipts, invoices, and records to support deductions.
• Payroll Records: Ensure proper reporting of employee wages, benefits, and tax withholdings.
• Bank Statements: Reconcile your business accounts with financial records to identify inconsistencies.

Keep records organized and accessible for at least three years, as the IRS typically audits returns from the past three years. However, if substantial errors are suspected, they may review returns from up to six years ago.

2. Review Your Tax Returns

Before meeting with the IRS, thoroughly review the tax return(s) in question. Look for:

• Errors in reported income, deductions, or credits.
• Discrepancies between your tax return and supporting documents.
• Areas where the IRS may request clarification or additional evidence.

Correcting minor errors proactively can demonstrate good faith and simplify the audit process.

3. Consult With Legal And Financial Professionals

An IRS audit is not just a financial issue. It can carry legal implications as well. Consulting with an experienced attorney and financial professional can ensure compliance with IRS procedures and protects against potential penalties:

• Tax Attorney: Offers legal protection and helps you understand your rights during the audit.
• Certified Public Accountant (CPA): Assists in reconciling records and preparing accurate responses to IRS inquiries.

At Bosshard Parke, our legal team can work alongside your tax advisors to create a comprehensive audit response strategy.

4. Understand The Audit Process

Familiarize yourself with the three main types of IRS audits:

• Correspondence Audit: Conducted by mail, requiring documentation for specific issues.
• Office Audit: Conducted at an IRS office, focusing on more complex issues.
• Field Audit: Conducted at your place of business, involving a thorough examination of financial records.

Knowing what type of audit you’re facing will help you tailor your preparation efforts.

5. Communicate Effectively With The IRS

During the audit:

• Provide only the information requested. Over-sharing can lead to additional scrutiny.
• Be honest and cooperative. Misrepresenting facts can lead to penalties or legal action.
• Request clarification if you don’t understand a question or request.

If you feel overwhelmed, your attorney can act as a liaison between your business and the IRS.

6. Monitor Deadlines

The IRS will provide deadlines for submitting documentation and responses. Missing these deadlines can result in fines or escalate the audit process. Stay on top of all correspondence and seek extensions if necessary.

How To Protect Your Business During An IRS Audit

Stay Proactive

Audits often highlight areas for improvement in recordkeeping and compliance. Use this as an opportunity to implement better financial practices, such as:

• Regularly reconciling accounts.
• Using accounting software to track income and expenses.
• Conducting internal audits to identify and correct discrepancies before they become issues.

Know Your Rights

As a taxpayer, you have the right to:

• Representation by an attorney or CPA.
• Appeal IRS decisions if you disagree with findings.
• Confidentiality regarding your tax information.

Conclusion

An IRS audit may feel overwhelming, but with proper preparation and expert guidance, your business can emerge stronger and more compliant. From organizing records to consulting legal counsel, every step you take can help protect your financial future.

At Bosshard Parke, we’re here to provide personalized legal support to businesses in La Crosse, Sparta, and surrounding areas. Our attorneys have extensive experience in tax law and can guide you through every step of the process.

Disclaimer: This blog is for informational purposes only and does not constitute legal advice. For personalized guidance, consult an attorney at Bosshard Parke.