For many years, the IRS's enforcement division has been feeling the pains of decreased budgets making compliance audits fewer and fewer. Does that mean that the IRS no longer audits or will keep the number of audits done at such a low number? The short answer - Nope.
While the number of IRS audits has been low for several years, the IRS has recently indicated that audits of Small Businesses will be on the increase in the very near future. Recent communications from the IRS have indicated that they are currently training up specialized auditors to once again start auditing and investigating Small Businesses. The objective of increasing audits is at least two-fold: increased compliance from companies that weren't always operating honestly, and an increase in overall revenues.
Audits are never fun, they take up a lot of time, and add a tremendous amount of stress to a business owner's day. Quite often, the auditors do find unreported income or deny expenses resulting in more taxes, penalties, and interest. On the other hand, audits are necessary as there are hundreds, if not thousands of businesses, that don't operate as required thereby receiving an unfair advantage over businesses that do operate by the rules.
So, what can you do to prevent an audit? Not much directly as audits are primarily randomized. However, there are statistical reviews that the agency can do to target companies for an audit. For instance, if your company is a brick and mortar establishment, but your office is reporting a mileage reimbursement to staff of 36,000 miles, that's likely to be a statistical anomaly that might raise a audit flag. That's not to say you can't have that many miles for your team, but it does seem odd for such a business.
What can be done if you are subject to an audit? To be honest, preparing for an audit starts LONG before an audit is even announced. It starts with solid record keeping from day 1 of your operations. Keeping detailed receipts of business income and expenses so that you can prove the business purpose of the expenses and such will make the audit go much more smoothly. Mileage records are looked at very diligently and have specifically laid out requirements to ensure the deduction is allowed. Writing on receipts that are ambiguous allows for you and your team to justify why that purchase should be allowed as a deduction. Trying to remember why you bought something three years later isn't an easy thing to do, so writing things down when you first enter the information will help tremendously. And many programs now allow you to attach copies of the receipt to the transaction so that you can look up the support documentation right then and there saving you and the auditor lots of time and money.
Another way to help your business succeed is by hiring a professional to review your records. This person can look over your information and see if the support you have would likely stand up to scrutiny during a federal or state audit. This person should also help you find out where your internal controls are weak and could use some help. This review will cost your firm some extra money, but it could help you in so many ways besides preparing for any possible audit that the cost could be worth much more to your firms economic success.
Finally, auditors are people too and doing an audit takes a lot of work for both the company being audited AND the auditor. So, if your records are clean, easy to find, and thorough, an auditor is less likely to do a lot of digging to find things that you and your team might have inadvertently overlooked. You don't have to become friends with the auditor, but being antagonistic towards her/him isn't going to do you or your firm any good either.
Audits have been around for decades and aren't going away. While the last decade or so has seen a massive reduction in audits overall, that trend isn't going to stay at that low level for long. It is much easier to get ready for an audit now by doing things correctly and keeping great records than it is to try and find receipts from years ago that have disappeared or make no sense.
If you or anyone you know needs help with a State or Federal tax audit, give our office a call! We'd be glad to help! Better yet, call us before you're audited and you'll be able to sleep better at night with fewer scary dreams knowing your as prepared as can be!