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How to prepare your business for an IRS tax audit

Running your own business in California takes a lot of work but can be highly rewarding. Learning that the IRS plans to perform an audit of your company is intimidating, but it’s important to know how to prepare.

Why do businesses get audited?

The Internal Revenue Service announced in 2020 that it was going to start performing more small business tax audits. There are many reasons behind these audits, including misclassification of employees, above-average income, cash-based business and excessive business expenses or deductions. Whatever the case, if you learn that the IRS is going to audit your business, it’s crucial to prepare ahead of time.

How can you prepare for a business audit?

The first thing you should do when you are notified that your business is going to undergo an IRS tax audit is to review the notification. It should explain the particulars of the upcoming audit and why it’s taking place. Usually, the IRS doesn’t focus on one specific issue. If you get all the details, you can better prepare.

You should gather all business and financial paperwork and keep it as organized as possible. Things you will want to have ready for the IRS audit include all bank statements, electronic payment records, receipts and travel logs. If you have taken out a business loan, you should include paperwork on that as well.

Business and personal paperwork should never be kept together because it can create confusion. Sometimes, it’s a good idea to present your personal transactions during an IRS audit, but keep them in a separate file just in case the auditor needs to review it.

Keep all records accurately maintained and organized. You should have at least all your records from the year of the pending audit.

Make sure you know what to expect ahead of time. It can help you avoid unwanted surprises. Remember that the IRS only contacts you via regular mail.

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