5 Things to Know About Auditing Management
Does the word “audit” send shivers down your spine? You’re not alone. Apart from taxes, one of the most feared words by business owners is “audit.” Business audits are worrying, costly, and time-consuming.
An audit may cost you money in terms of possible taxes, professional fees, penalties, and interests. However, when business owners better understand the auditing process, it may reduce their worry and concerns. It will also help them better handle the audit process better.
Below are five things you should know about auditing management for your business:
1: You Have Very Low Chances of IRS Auditing You
It’s improbable for the IRS to audit you. According to data released by the IRS in 2020, only 0.1% of S corporations were audited that fiscal year. This databook provides essential statistics on Internal Revenue Authority audit activities during the fiscal year from 30th Sep 2019 to 1st Oct 2020.
Based on the same data, the chances of audit for partnership companies were even lower. On the other hand, 0.3% of C companies with a balance sheet of $5million were audited. Unfortunately, Schedule C filers’ statistics were not separated.
Before you start worrying about IRS audits and the impacts they will have on your business, it’s essential to remember that there are low chances of the IRS auditing your firm. However, the IRS announced that they are seeking a budget increment to increase the number of audits.
However, it’s still unclear how much the increased budget will impact the number of audits. But they announced that they are looking to increase the auditing of smaller businesses by 50%. This is still a considerably lower percentage.
However, you can also initiate a service audit for your business. For example, if you’re having trouble with your service providers, such as an elevator service provider, you can always hire a company to help you audit the contract.
Check out https://auditmate.com/elevator-auditing-management/ for all your elevator audit management services.
2: Who Will Get Audited, the Partners or the Partnership?
There is a special audit system known as the BBA Centralized Partnership Audit Regime. Under this regime, the IRS will audit the partnerships at the entity level. This audit also includes Limited Liability Companies or LLCs that file tax returns as partnerships.
This audit system means that the amount owed in taxes or penalties is managed by the partnership, including any adjustments made to businesses return. However, there is an exception where the partners handle the owed amount if the company chooses to push it to them.
However, there is also another option where the company can opt-out of the audit. Companies with this option include small partnerships with less than 100 partners, all individuals, S Corporations, C Corporations, foreign entities, and estates of departed partners.
If a business conducts this election, the IRS should only audit the partner and question them about specific partnership items and their treatment.
3: If IRS Selects You for an Audit, You Have Rights
If the IRS selects your business for an audit by the IRS, remember that you have rights. There are many reasons why the IRS chooses companies for auditing.
One reason is an income omission that could have been reported on an information return. For example, you could have incorrectly reported your income on Schedule K-1 from a partnership or an S Corporation or omitted some income on Schedule C of Form 1040. This information may be recounted to you and the IRS on Form 1099-NEC.
In light of such errors, the IRS will send you a correspondence audit letter to inform you of their intention to audit your business. If you agree, it will be easy to settle up.
However, if you disagree, always remember that you have rights as a taxpayer. You can challenge the IRS and their intention to audit your company. Your rights during the challenge include:
- The right to representation by a tax professional
- The right to receiving courteous service
- The right to confidentiality protection
Ensure you understand these rights and take advantage of them during the process. However, you should also comply with IRS requests for essential information and offer the information on time.
4: The Initial Audit Isn’t the Last Word
If you initially agreed to the audit but don’t agree with the results of the audit, they can always appeal.
Step one of the appeal process is informing the IRS of your intention. You can either make a small case request if the audit shows that you owe the IRS less than $25,000, or you can make a formal protest within the IRS if the amount you owe is more.
Remember that if you disagree with the results, you have a right to appeal the results. However, before requesting an appeal, ensure that the IRS auditor has provided all the information they asked for. This includes documents, data, and explanations.
5: You Can Always Appeal To a Judge
Are you still not satisfied with the auditing team’s findings after the appeal? You have the right to get your case heard by a judge. Instead of paying the amount of money the IRS says you owe, you can opt to take your case to a tax court if you know you were right.
However, to get a hearing, ensure you file your case within three months or 90 days after the IRS sends you the deficiency. If the total amount is less than $50,000, you can file your case in a small tax court. This is an inexpensive but fast process.
However, you will no longer have the right to appeal the court’s final decision. Alternatively, you could opt to pay the amount you owe then go to the Federal Claim Court or the U.S. district court to seek a tax refund.
You Don’t Have To Fear IRS Auditing Anymore
Business auditing is scary, expensive, and time-consuming. However, the best way to defend yourself against an audit is to ensure that you handle everything correctly from the start. Only claim tax credits and deductions that your business is eligible for, file your taxes on time, and consistently report the correct income amount.
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