A small business audit doesn’t necessarily mean you’re dealing with the Internal Revenue Service. Small business owners can conduct annual internal audits. In any case, the audit process involves checking accounting records and tax return numbers. The idea is to ensure that your financial information is accurate and compliant with tax laws.
What is a small business exam?
This is an audit of small business tax returns and financial records. The idea is to make sure everything is correct. Books and accounts are audited by either external auditors or internal auditors.
Keep in mind that you will need to report things like a foreign bank account to the IRS.
Why are companies audited?
The IRS conducts small business audits for a variety of reasons. Here are some of the common ways a business owner may face an IRS agent.
- Eligible for 100% business use for a personal vehicle.
- Claim for too many consecutive years of loss of business.
- Rounding off financial information numbers.
- Other bad financial practices like unbalanced deductions.
- An above-average small business income can trigger an examination notice. However, the odds aren’t high that you’ll end up in an IRS office over this matter.
Benefits of an audit
Audits serve a number of useful purposes. Some companies are required to review financial statements to comply with regulations. Others must have financial records checked by an accounting firm to maintain efficiency. Here are some good reasons why most audits are beneficial.
- Detect Fraud: An auditor checks for different types of fraud. Eradication is important for sole proprietorships and/or public companiesS It’s also a good way to uncover employee theft. Risk factors include having multiple employees involved in the program.
- Increase efficiency: Regular audits can identify redundant procedures and practices. The audit process can make recommendations for streamlining and improving processes.
- Audits ensure compliance: Every industry has legal obligations. Small businesses confronted with non-compliance can lose customers and face hefty fines. Audit reports are important to reconcile compliance with legal obligations. A statistical formula to calculate a sample size is a good place to start.
- Audits ensure better budgets: An external audit can deal with business tax returns, personal tax returns and bank statements. An internal audit can also help business owners with a better budget. Liabilities, assets, expenses, and various types of income are all included. The audit process can help identify where a company’s finances can be improved. A better budget follows, of course.
- Audits can help a small business get funded. Entrepreneurs usually think about growth. External audits can help your company get financing from investors or banks. A line of credit can help you take your business operations to the next level.
- Audits highlight bad practices. These can help your organization identify internal controls and audit practices that need to change. Optimizing problems makes timing less complicated.
What types of audits are there?
A small business audit can take many forms. You must compile your financial statements and receipts and loan agreements for each of the following:
As the name suggests, an internal audit takes place in your company. These internal audits are conducted by individuals or a team. They look at financial statements, compliance, and operational issues, to name just a few areas.
This is an IRS exam. A tax advisor checks the tax return for correctness. An IRS auditor will look at the companies’ financial records. These types of small business audits do not always indicate wrongdoing. Such an IRS check is selected based on several characteristics.
HR managers in a company conduct this type of internal audit. This is about employee information and making sure they are getting the right pay.
These are technical audits that are part of civil or criminal investigations. These external audits may include an anti-fraud agency. 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. There’s no harm in knowing the 1099 rules to ensure you file additional earnings.
These are IRS audits conducted by phone or email. You are looking for additional tax information on a specific issue or item. It is one of the least rigorous types of tax audits. Correspondence exams are often aimed at non-profit organizations and charities.
This is a different type of IRS audit. These can be done at your accountant, your company, or even at your home. Field audits are thorough and comprehensive.
What is included in an audit?
Whether you are looking at an IRS audit, an internal audit, or some other type of tax professional, you need to know the records required. The following can help make things run smoothly. This is only a partial list of some of the financial documents you may be required to provide.
Documents detailing theft or loss
If a business suffers damage, an IRS audit may require photos. You will need copies of police reports if there is no insurance.
These types of business expenses include organizational and individual names of the people who were paid. An external audit also wants to see the dates you paid them. Plus the type of service.
IRS audits will want to see how these relate to your business. The verification process takes into account the money paid and received. Plus, mileage maybe.
A review would like to see a copy of the original loan with the location of the property. The loan amount and the terms should also be included. Be sure to include a breakdown of how the money was used for an external auditor.
Independent contractors can include these in an audit report. They must be labeled with the business purpose of the trip. Organizing these records helps expedite any type of exam.
How to prepare for an audit
There are a few other things you need to do to prepare for an exam. You cannot completely avoid any of these. However, there are a few things you can do to prepare.
- Keep accurate records. Remember that electronic files are usually accepted. However, if you cannot locate your documentation, even a valid expense report may be rejected.
- An audit of a tax matter becomes more serious when your records are terrible. If you need help or have deducted expenses you shouldn’t or lost income, contact a tax attorney.
Remember that there are different types of audits. If you receive a notification from an IRS manager wanting to see your books, here’s what you need to do.
IRS Business Review Process
These types of audits don’t have to be stressful. This type of audit checks your business information to ensure it is correct. The IRS may select your company at random or through appropriate screening. These occur when your company has worked with someone who has passed an audit.
Other triggers are excessive spending and misclassifications by employees.
- The process begins with a letter detailing the documents and records needed.
- These records are checked by IRS agents.
- There is a final conference and an audit report on the phone.
- The IRS will tell you if you owe money, penalties, and interest.
- You close the case when 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 the basis for practices and methods.
Which financial statements are required for a final examination?
These audits must contain specific statements. These include an income statement, a balance sheet, and a cash flow statement.
Who can request an audit?
An external audit can be requested by a number of different bodies. Like the IRS, a tax agency or insurance company, and even a third party.
Why should you conduct an independent tax audit?
It’s always a good idea to have another pair of eyes look at your numbers. This is a particularly positive move when looking for investors. The independent verification process strengthens your credibility.
An independent tax audit is a good idea when looking for a loan. And if you want to sell a company.
What Rights Do You Have During an IRS Audit of Your Business?
Knowing what rights a small business has through an IRS audit helps. Here are just some of the things businesses and taxpayers should be aware of.
- You have the right to representation. This can be a tax attorney or an auditor.
- You have the right to pay only the amount of tax due.
- You can file a tax assessment notice within 30 days of receiving the ruling.
You also have the right to courteous and professional service from IRS officials.
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