The phrase “audit” probably sends shivers up the spines of most small enterprise homeowners. Audits are worrisome, time consuming, and really costly by way of skilled charges and potential taxes, curiosity, and penalties.
Enterprise Audit Truths
However a greater understanding of audits might cut back considerations or, if essential, assist to deal with them extra simply.
1. The possibilities of being audited are very low.
Based on the 2020 IRS Information Guide that gives statistics on IRS audit actions throughout the federal government’s earlier fiscal yr (September 30, 2019, by way of October 1, 2020), solely 0.1% of S firms have been audited. The proportion for partnerships was even decrease. The speed for C company with a stability sheet of $5 million was solely 0.3%. There are not any separate statistics for Schedule C filers.
Whereas the IRS is searching for funds will increase with the intention to step up audits, it’s not clear to what extent there shall be an elevated audit threat sooner or later. The IRS introduced late final yr that it might improve the variety of audits of small companies in 2021 by 50%. That is nonetheless a fairly low share.
2. Partnerships or companions? Who will get audited?
Beneath a particular audit regime, referred to as the BBA Centralized Partnership Audit Regime, partnerships (together with restricted legal responsibility corporations that file partnership returns) are audited on the entity stage. Because of this changes are made to the enterprise return and any quantities owed are dealt with by the partnership (except it chooses to push this price out to companions).
Nonetheless, “small partnerships”—these with 100 or fewer partnerships all of whom are people, C firms, S firms, estates of deceased companions, and sure overseas entities—might elect out of this audit regime. If the election is made, the IRS should audit a associate to query how a partnership merchandise has been handled.
3. If chosen for audit, you’ve rights.
Chances are you’ll be chosen for audit for any variety of causes, together with an omission of earnings that’s been reported to the IRS on an info return (e.g., you didn’t choose up correctly the earnings reported on Schedule Ok-1 out of your S company or partnership or omitted earnings on Schedule C of Type 1040 that was reported to you—and the IRS—on Type 1099-NEC). If you happen to agree with the audit, which can be within the type of a easy letter (“correspondence audit”), you’ll be able to settle up shortly.
However when you don’t agree and wish to problem the IRS place, you’ve sure rights. Your rights embody being introduced by a tax skilled, having your confidentiality protected, and receiving courteous service. However you additionally should adjust to requests for info and achieve this in a well timed method. Test IRS Publication 556 to study your rights.
4. The preliminary audit isn’t the ultimate reply.
If you happen to don’t agree with the outcomes of an audit, you’ve a proper to attraction. Step one is an attraction throughout the IRS. If the entire quantity the IRS says is owed (taxes, curiosity, and penalties) is $25,000 or much less, it’s possible you’ll make a small case request. In any other case, it’s important to make a extra formal protest.
There’s extra about your appeals rights and find out how to protest when you don’t agree with the IRS in Publication 5.
5. The IRS doesn’t have the final phrase.
If, after interesting an IRS willpower about your return, you continue to assume you’re proper, you’ll be able to inform it to the choose. You don’t must pay what the IRS says you owe. As a substitute, you’ll be able to carry the matter to the Tax Court docket. You could file inside 90 days of date the IRS discover of deficiency is mailed to you.
If the quantity excellent is not more than $50,000, you should utilize a small Tax Court docket process (see Title XVII for particulars). This process prices you much less and will get finished faster, however you’ll be able to’t attraction the courtroom’s choice.
The IRS has extra info to assist with submitting a petition in Tax Court docket.
Alternatively, it’s possible you’ll select to pay what’s owed after which search a tax refund in a U.S. district courtroom or Federal Claims Court docket.
The perfect protection in opposition to being audited is to deal with issues correctly from the beginning. Report earnings accurately, declare solely deductions and credit to which you might be entitled (and have supporting documentation), and file on time (together with relevant extensions).
If you happen to do come underneath audit, it’s possible you’ll go it alone (“professional se”), however it’s additionally extremely advisable to seek the advice of with a tax skilled. This may aid you decide the very best plan of action and will wind up saving you these ever-present considerations…money and time.