Surviving an IRS Audit
of Your Business
Complimentary Guidance from The Tax Office Inc., on how to survive an IRS Business Audit
Surviving an IRS Audit of Your Business
Executive Summary

It is no fun to receive that letter from the Internal Revenue Service telling you that your business return
is going to be audited but how you respond to an audit letter can improve your chance of a positive
result.
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Reasons for your business being audited range from expense related red flags to accounting
inconsistencies and more.

Roughly 1.5% of C Corporation, .4% of Partnership and .4% of S Corporation returns are audited each
year.

There are four different types of business audits, from the easier to deal with correspondence audit to
the dreaded TCMP (taxpayer compliance measurement program) Audit.

Good organization is the best preparation for an audit.

Understand your rights so that you can protect them.
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After the audit is over, the auditor will send you a letter of their findings. This letter, while it may be
intimidating, is not binding.

Bringing a professional in can save more money than it costs.
Surviving an IRS Audit of Your Business
Table of Contents
Introduction……………………………………………………………………………………………… 1-2
4 Types of Audits……………………………………………………………………………………….. 2-3
Preparing for an Audit………………………………………………………………………………….. 3
Responding to Audit results…………………………………………………………………………… 4
Conclusion………………………………………………………………………………………………. 5
About Us………………………………………………………………………………………………… 6
Surviving an IRS Audit of Your Business
Introduction
It is no fun to receive that letter from the Internal Revenue Service telling you that your business return is
going to be audited. Even if the letter is only asking to clarify a particular issue on your tax return, it strikes
fear into the hearts of most taxpayers. It is important to not allow yourself to get upset about the letter but to
make your first actions count. How you initially respond to receiving that letter can set the stage for the
results of the audit.
The bigger your income, the more involved your return, the more comprehensive the audit, the bigger
benefit there will be to hiring a professional to represent you while dealing with the IRS. This paper will help
you to have a better understanding of what to expect during the audit process. Knowledge is power, and
knowing why you are being audited and what information they are really looking for will help you better
prepare for the audit.
According to the Internal Revenue Service Data book for Fiscal Year 2011 (October 1, 2010 through
September 30, 2011) there were:

2,313,000 C-Corp tax returns filed,
4,545,000 S-Corp tax returns filed,
3,574,000 Partnership Tax returns filed, and
29,446,000 Employment tax returns filed
( This includes the various Forms 940, 941,
943, and 945 required by different business
types).

Roughly 1.5% of C Corporation, .4% of
Partnership and .4% of S Corporation
returns were audited during this time period
for a total of over 59,000 returns.

The average additional tax recommended by
the auditor after the examination for a small
corporation business return (less than
$10,000,000 in total assets) for a field audit
was $27,420, and for a correspondence
audit was $6,815.

The average additional tax recommended by the auditor after the examination for a large corporation
(greater than $10,000,000 in total assets) for a field audit was $2,413,317 and for a correspondence
audit was $117.694.
Table 9a of http://www.irs.gov/pub/irs-soi/11databk.pdf further breaks down the allocations of business
sizes and average recommended tax per return.
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Surviving an IRS Audit of Your Business
If you are self-employed, here are a couple of quick tips that can help keep you under the IRS radar screen
when it comes to being audited:
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Make appropriate quarterly tax deposits
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Keep business and personal income and expenses separate
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Record all income, whether you receive a 1099 or not
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Only take a home office deduction if it supportable
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File 1099s if required
Four Types of Business Audits
In a correspondence audit, the
IRS is typically looking for
validation of just a few items.
Sending in copies of cancelled
checks or otherwise confirming
that a number is valid or has
been validly reported is all that is
required. This would most likely
be used only for small
businesses, and the larger your
business, the less chance of your
being limited to a
correspondence audit.
For an office audit, you will
receive a letter from the IRS that
asks about certain items and
requests you (or your representative) to bring the documentation to a local IRS office for the auditor's
review. This is typical for a smaller business and an audit that has only a few areas of question. With
proper organization, it is easy to control the scope of this type of audit. Make sure any and all responses
are limited to only what is necessary to answer the questions asked.
A field audit will probably be initiated by a phone call to set up an interview with the principals, arrange
date/time to come to your place of business, find out where the records are kept, and provide a list of
records that need to be available. There is a huge amount of value to making sure you get your
professional representative involved in this audit as soon as you can. Your tax preparer will likely move the
audit, if possible, to their office and this can significantly help to limit the scope of the engagement.
A TCMP (taxpayer compliance measurement program) Audit is both expensive and time consuming.
For whatever reason you may have been chosen, it is really about the IRS gathering statistics. They will
review every line of your return and as much documentation as they feel is necessary to map out overall
tax law compliance. This information is used by the IRS to update their information on creating the scoring
system that will select audits in the future.
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Surviving an IRS Audit of Your Business
While it is difficult to limit the scope of this type of audit, good organization can at least increase the
efficiency and reduce the interruptions to your business. Your professional representative can help you to
get the IRS the information it needs and hopefully limit the disturbances to your daily business operations.
Preparing for an Audit
Even if you prepared your own business return, you can and should retain a professional to help you deal
with the audit. Your tax preparer or audit professional representative will help you make sure that you stay
focused on what you need to do to prepare for an audit. They have done this before, and that experience is
invaluable to you for both the process (and hassle) of the audit as well as increasing your chance of a
positive outcome. Even though the audit is important, you still have a business to run and handing off the
headache of the audit to a professional allows you to continue to run your business.
After the initial response to the audit notice or phone call, and the set up or postponement of the actual
meeting, you need to organize your information. If you have a professional tax preparer, they may already
have copies of all of your documentation, organized from when they prepared your return. If you had only
given your preparer printouts from your software, they may need to request the backup information to
properly document for the audit.
Make sure you give them all the information they request so that they can make the best choices of
documentation to answer the auditors’ questions while still protecting the scope of the engagement. Source
documents may include cancelled checks, credit card receipts, purchase and sales invoices, bank
statements, and all other documentation that relates to conducting your business.
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Surviving an IRS Audit of Your Business
Proper Responses to the Audit Results
After the audit is over, the auditor will send you a letter of their findings. This letter, while it may be
intimidating, is not binding. Do not sign off on anything until you have reviewed the letter with a professional
and understand and agree with what you are signing. If you disagree with the findings you may request an
appeal. Remember, you have rights and it is in your best interest to be aware of them.
The auditor’s letter should include information on how to appropriately appeal the findings.
In general, there are 3 levels of appeal and they will follow in this order – contacting the auditor's manager,
contacting an IRS appeals officer, and following up with the United States Tax Court. The higher up these
levels you go, the more important it is to have educated and experienced professional representation. Each
level has specific requirements and deadlines that must be followed in order to proceed.
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Surviving an IRS Audit of Your Business
Conclusion
Unfortunately it is hard to compare in dollars
what would be the absolute difference in your
results if you represent yourself compared to
your results by having a professional represent
you. But CPA's have experience in responding
to audits, are able to keep their emotions out of
it, and are better able to limit their responses to
questioning. CPA's are aware of what penalties
can be negotiated and how best to negotiate
the reduction of penalties.
Typically, the money saved by having a
professional represent you during an IRS audit
is more than the cost of that professional.
Additionally, it means you will not have to
spend as much time away from your business
if your professional representative gathers,
organizes, and spends the time with the
auditor. You are in the business of your
business. A professional CPA is in the
business of preparing tax returns and dealing
with the IRS.
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Surviving an IRS Audit of Your Business
About The Tax Office, Inc.
Northern California’ Most Reliable Tax, Bookkeeping and Business Advisors
Since 1986, The Tax Office, Inc. has been the “go to” tax, accounting and
bookkeeping firm for hundreds of people and business throughout Northern
California. Let us help you solve your tax, accounting or bookkeeping puzzle.
Among the issues we help our clients address are:





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How to pay the least possible amount of Federal and State taxes
Preparing the ever-growing pile of complicated tax forms
Protecting you (and your wallet) by fighting IRS and other Government agency tax audits
Keeping the books of your business up to date with QuickBooks and online bookkeeping
Interpreting the numbers of your financial situation to pinpoint ways to improve the profitability or performance of your
business
Lowering the costs and eliminating the hassles of doing payroll
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