If the phrase “audited by the IRS” fills you with dread, you are not alone. Getting audited is something no business owner wants to go through. But, sometimes audits take place. If you get audited by the IRS, what happens?
What happens when you get audited
Most business owners don’t want to think about what happens during an audit—they want to know how to avoid an IRS audit altogether. There are a few reasons why you might get audited by the IRS. The IRS could randomly select you for an audit. Or, you could make errors on your IRS forms.
Only about 2.5% of small business owners get audited. But, understanding what happens if you get audited is an important part of being a business owner. If you are audited, you might have some questions:
- What information does the IRS need?
- What is the Taxpayer Bill of Rights?
- How does the IRS notify you of an audit?
- How long will the audit take?
- What is the IRS audit statute of limitations?
- What are IRS audit penalties?
For answers to these questions, continue reading.
What information does the IRS need?
The IRS will tell you what records they want to see. The records are documents that support claims on your tax returns. Here are just some of the records the IRS might ask you for:
- Canceled checks
- Legal papers
- Loan agreements
- Employment documents
Make sure you organize your records by year and type of income or expense. Include additional information detailing the transactions. If you have any further questions about the records, contact your auditor.
What is the Taxpayer Bill of Rights?
In 2014, the IRS announced the Taxpayer Bill of Rights, a document meant to help taxpayers understand the complexity of taxes. There are 10 basic rights that apply to general taxpayers as well as those being audited:
- The Right to Be Informed
- The Right to Quality Service
- The Right to Pay No More than the Correct Amount of Tax
- The Right to Challenge the IRS’s Position and Be Heard
- The Right to Appeal an IRS Decision in an Independent Forum
- The Right to Finality
- The Right to Privacy
- The Right to Confidentiality
- The Right to Retain Representation
- The Right to a Fair and Just Tax System
Before you get stressed about what the IRS can and can’t do during an audit, consult the Taxpayer Bill of Rights.
How does the IRS notify you of an audit?
If you are getting audited by the IRS, you will receive a notice in the mail; the IRS will not begin an audit with a telephone call or email.
The IRS tax notice will give you contact information and instructions for what to do next. The IRS can choose to conduct your audit by mail or in person. Follow the directions in your notice. If the IRS wants to conduct your audit by mail, you can ask for an in-person audit.
How long does an IRS audit take?
According to the IRS, the audit process does not have a set time limit. When you receive the notice is when the IRS audit process begins.
The IRS audit process timeline is determined by how accurate your records are, the type of audit, you and the auditor’s availability, and your response to the audit findings.
For example, if you disagree with what the auditor finds, the audit process is not over. You need to talk with the IRS further and may even need to file an appeal, which can prolong the process.
Make sure you always maintain organized business records and financial statements in case of an audit. Having accurate and organized records not only helps prevent an audit, but it can also streamline the process if you are audited.
What is the IRS audit statute of limitations?
The IRS audit statute of limitations describes how far back the IRS can go into your tax returns. According to the IRS, the time period varies depending on how big of an error they catch.
Typically, the IRS can use any small business tax return filed within the last three years. However, the IRS can go back six years (or more in rare cases) if there is a big mistake. Most audits only consist of returns filed within the last two years.
By law, you are required to keep all the records you used to prepare your tax return for at least three years from the date you file the tax return. You might want to keep accurate records longer so you are prepared if an auditor uses tax returns from six years ago.
What are IRS audit penalties?
If the audit concludes that you did not pay enough taxes, you could face penalties in addition to any unpaid taxes you might have. Here are some of reasons you might be penalized, according to the IRS:
- Understating your tax liability
- Failing to file
- Failing to pay
- Errors on tax return
IRS tax audit penalties range from owing money to prison time. Take a look at some of the IRS audit penalties:
The IRS can apply an additional percentage to the amount of taxes you owe them:
- 20% or 40% penalty: If you made a mistake on your tax return, you could face a 20% or 40% penalty, depending on how severe the error is.
- 75% penalty: This is reserved for more serious cases, like fraud.
If you have a significant tax debt that you are unable to pay, the IRS can seize your property and sell it to get the money you owe them if you aren’t protected by limited liability.
Prison time is reserved for those who attempt to get away with criminal tax evasion. Tax evasion is the intentional underpayment of tax debts. Business owners purposely committing fraud to get out of paying taxes can face a jail sentence up to five years, fines up to $250,000 or $500,000 for corporations, or both.
Fraud is extremely different than negligence — if you make a mistake on your tax return, the IRS will determine if it is negligence or fraud.
Be prepared in case of an IRS audit. Always keep accurate and organized records for your business. With Patriot’s online accounting software, you can store electronic records of incoming and outgoing money. The software ensures accurate calculations and is backed up in the cloud. Try it for free today!
This article is updated from its original publication date of April 13, 2017.This is not intended as legal advice; for more information, please click here.