Tax Audit Preparedness for Houston Businesses
Every year, the IRS audits between 1 and 2 percent of all U.S. businesses. As such, tax audit preparedness is a high priority for small business owners.
Tax audit preparedness services include:
- Identifying (and correcting) tax compliance issues
- Properly categorizing and reporting transactions
- Leveraging tax deductions while observing tax laws
- Assessing the entity’s prior tax reporting history
An IRS audit does not necessarily mean that your company has done something wrong, but the process is challenging for every business, nonetheless.
The Evident Pros team can prepare your organization for this challenge and provide ongoing representation through the auditing process.
How Evident Pros Can Help with Tax Audit Preparedness
The Evident Pros team is staffed with CPAs and enrolled agents that have nearly a century of combined experience. As such, we are well-positioned to offer the following tax audit preparedness services:
- Expert guidance with relevant tax codes – An experienced CPA can advise clients on optimal tax compliance strategies and bring specialized knowledge to the process. For example, a CPA understands the difference between willful and non-willful noncompliance and will apply the theory appropriately.
With broad experience across a variety of clients and industries, a reputable CPA can incorporate the IRS’s own auditing techniques into a client’s audit prep, regardless of the industry it operates in.
- Organizing financial records for accurate auditing prep – The first step in audit preparation (other than bringing in a tax expert) is ensuring all financial documentation is accurate and accessible. This includes income, expense, deduction and loss reporting – and each must be organized according to tax year. If any of this documentation is missing or has been destroyed (in a flood or fire, for instance), then it must be reconstructed as accurately as possible.
We can help your company identify the documentation it requires, access that documentation, and ensure it is properly used to support audit readiness.
- Analysis of internal controls and financial statement preparation – The IRS will verify the integrity of your financial statements and your company’s internal accounting controls. There are guidelines governing both, so they both need separate attention when preparing for a tax audit. During this analysis, your tax audit preparedness team will assess the quality of your company’s accounting practices and its data handling measures. If weaknesses are apparent, we will work to resolve them.
- Reconciling transactions and account activity – If your company has engaged in any complex transactions over the past tax year, how that transaction is categorized and reported may have an outsized impact on your IRS audit preparedness. In accordance with current tax code, a CPA will ensure that all business transactions have been properly managed from a tax compliance standpoint, protecting your company from an expensive surprise.
Further, your audit readiness team can analyze your company’s account activity, reconcile transactions out of those accounts and verify that personal and business funds have not been intermingled. It is vitally important that personal and company accounts remain separate, as failing to do so may expose your personal assets to liability.
The Importance of Working with a CPA for Tax Audit Preparedness
If your organization has been selected for an IRS audit, a cascade of questions and information requests will follow. As the business owner, you may be overwhelmed by this process, and it may place undue burdens on you and your staff.
CPAs and enrolled agents may represent your business to the IRS during an audit, meaning they can maintain correspondence with the agency throughout the auditing process. As successful audits hinge on timeliness and professionalism (the IRS will expect both), and having a CPA on your side will expedite your audit toward a successful outcome.
How Does the IRS Determine Which Businesses to Audit?
You’ve likely heard that the IRS selects businesses to audit at random. To an extent, this is true, as the IRS does allow for some randomness in its selection criteria. However, the agency also checks each business using algorithmic and comparison methods. Any of the following may throw a red flag during these reviews:
- Taking many or particularly large home office or meal and entertainment deductions
- Reporting major swings in income, either upward or downward
- Claiming losses for many years in a row
- Failing to report salaries
- Classifying employees as independent contractors erroneously
- Using round numbers when reporting income
- Declaring bankruptcy or rapidly contracting the business
Businesses that operate with cash only are also more likely to be targeted for an audit, given the comparative ease with which these companies can under-report their income. If audited, it can be a challenge for cash-only companies to prove their tax statements.
The Three Primary Types of Tax Audits, and What to Expect During Them
The IRS has several means through which it can execute a business tax audit. The process involved during your audit will depend on which method the agency selects. They include:
- Correspondence audits – Correspondence audits, like the term suggests, are handled entirely through mail. These audits tend to be less comprehensive and usually involve additional record requests, record verification or error corrections.
- In-person, office audits – During an in-person audit, the business owner is expected to provide physical copies of requested documentation at a nearby IRS office. These audits are quickly dropping in prevalence and it’s likely that, if audited, it will be through correspondence or a field audit.
- Field audits – Field audits are the most in-depth (and most common) form of audit and involve IRS agents visiting the place of business. While present, agents will request documentation, including tax returns. There are limitations on what agents can ask for during this time, but a prompt, professional response is expected.
Field audits are often more likely for larger businesses or those with complex tax situations.
Tax Audit Preparedness Success Begins with Having a Reputable CPA on Your Team
The chances of a tax audit may be low among businesses, yet it is enough to demand preparation. A trusted tax professional – whether a CPA or an enrolled agent – can help your organization put that preparation in place.
Evident Pros assumes that tax expert role for many organizations in Houston, and beyond. Our expert fluency in tax code, understanding of best accounting practices, and experience with a diverse array of businesses is why our clients trust us to provide tax preparation services.
