Startup CPAs - Audits in a Nutshell
Audits can happen to anyone. It doesn’t mean that you did something wrong. To help you understand this topic, let’s talk about audits and how to prepare for them.
What an IRS audit is
An IRS audit is a review/examination of an organization's or individual's accounts and financial information. It is to ensure information is reported correctly according to the tax laws, and to verify the reported amount of tax is correct. The IRS will investigate or examine your business and tax returns and determine whether there are any adjustments or amendments that need to be made.
Why would your company be chosen
Selection for an audit does not always suggest there is a problem. The IRS uses several different methods including random selection and computer screening.
When an auditor reviews your company's tax return, they may accept it or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.
What do you need to provide
The IRS will provide you with a written request for the specific documents they want to see. The IRS accepts some electronic records that are produced by tax software. The IRS may request those or other types of records. The law requires you to keep all records used to prepare tax returns for at least three years from the date the tax return was filed.
How long will an audit take and how much will it cost
The length and cost are connected and vary depending on: the type of audit, the complexity of the issues, the availability of infor requested, the availability of both parties for scheduling meetings, and your agreement or disagreement with the findings.
How does the IRS conclude an audit
An audit can be concluded in three ways:
No change - an audit in which you have substantiated all of the items being reviewed and results in no changes.
Agreed - an audit where the IRS proposed changes and you understand and agree with the changes.
Disagreed - an audit where the IRS has proposed changes and you understand but disagree with the changes.
What you can do if you disagree with the conclusion
You can request a conference with an IRS manager. The IRS also offers mediation or you can file an appeal if there is enough time remaining on the statute of limitations.
Conclusion
Although it’s not required initially for a Startup, audited statements may be required at some point for a potential investor, bank, or IRS. Audits can happen to anyone. As long as you keep the financial records and have a tidy accounting book, the audit process should be a smooth ride.
