If the Internal Revenue Service decides to audit your small business, you may imagine your worst fears coming true. However, those fears may not be justified. You need to know what kinds of consequences may befall you if the IRS finds unfavorably against you. You should examine the range of actions that can be taken against you -- and that you can take to defend yourself.
Correspondence Audits
A correspondence audit is the mildest form of IRS audit. This process involves the IRS writing to you asking for documentation that is missing from your return. You simply mail the required documents and the IRS makes a determination as to whether your deductions and income claims are accurate. If you have the required documentation and mail it, the worst that can happen is you will owe more in taxes than you thought you did. You also could owe interest on the underpaid tax. If you do not have the required documentation, the IRS can move to the next type of audit, which is more in-depth.
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Office Audits
If you are required to physically report to an IRS location, you are undergoing an office audit. This typically means the IRS considers some of your deductions to be unusually high. Bring the required documentation to the IRS office near you, and the IRS will determine if your claims are founded. The worst that can happen is you will owe more taxes with possible penalties, unless you do not have the documentation. In that event, the IRS may expand the audit to look at your tax return more closely.
Field Audits
During a field audit, the IRS agent comes to your place of business. You should expect to have your accounting records examined thoroughly. You should assume that the focus of this type of audit is broad and can include items the IRS has not named in advance. If the IRS finds questionable bookkeeping, the worst that can happen is heavy fines and a lien against your business that indicates you must pay the IRS before you pay any creditors. If the IRS finds tax fraud, you could be subject to prosecution resulting in jail time.
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Audit Reconsideration
You can appeal an audit finding by contacting the auditor's supervisor. If that does not bring you satisfaction, you can file an appeal with the IRS Appeals Office. You must send a Protest Letter to the IRS Appeals office within 30 days of receiving your final audit report. If you go through the appeals process and are still not satisfied, you can appeal to the U.S. Tax Court, the U.S. Court of Federal Claims or the U.S. District Court in the state where you live. The worst that can happen after all of these appeals is that you will have to pay the tax designated in the final audit report.
