Undergoing an IRS audit can be stressful and time-consuming for companies. Many fear the financial backlash and potential damage that a full-scale audit with negative results poses to their reputations in the business community. However, Mark Everson, former IRS commissioner, has released guidance on what to expect and how to prepare for the examination.
Everson explains that understanding the purpose of the audit can be crucial in preparing and organizing documentation. Business audits typically surround offshore accounts, transfer pricing, executive compensation, employee classifications, and passive hobbies and activities. These areas represent the largest opportunities for unreported income and tax law
violations. Auditors are more likely to scrutinize these categories because they may give the agency the largest potential for closing the tax gap via penalties and interest.
Following notification that an in-person audit will take place, Everson urges owners to gather a team of internal employees and tax professionals to ensure the parties involved are prepared to answer questions. A lack of preparation or varied responses may prompt auditors to become more thorough in their examination, which can lengthen the process.
It’s also crucial to establish the scope of the examination to ensure all financial records are organized and available for the inspection. This can also prevent surprises and detours during the exam, Everson advises.
Lastly, it’s imperative to meet the deadlines imposed for producing information and documentation for the IRS. Failing to adhere to schedules will not garner businesses favor with the federal tax agency and may continue to delay the auditing process. Consulting a professional to ensure all relevant paperwork is adequately prepared in a timely manner can cut down on mistakes and ensure the examination goes as smoothly as possible.