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When most people hear the word "audit," red flags go up; and their minds automatically jump to the dreaded Internal Revenue (IRS) audit. Yes, the IRS is a type of audit, but it's not the only audit you should be prepared face.
Many businesses, especially larger ones, regularly conduct internal audits to make sure their books are accurate. If you're applying for certain types of loans, special business programs, or certifications, you may need to have an external audit.
And if your business tax return has problems or discrepancies, the IRS may indeed flag you for the dreaded tax audit. Let's take a closer look at a few different types of small business audits and as well as considerations for creating a small business audit checklist.
The IRS audit is probably the most well-known and dreaded type of audit. This audit occurs because your business has been randomly selected or because of a discrepancy over your small business income tax return.
In the event you're being audited by the IRS, you'll be notified via mail. Then the actual audit can be conducted through the mail or by an in-person interview. If you've been notified by the IRS of a small business audit, it's critical you consult with the tax professionals at John F. Dennehy CPA in addition to creating a small business audit checklist.
An internal audit is a process initiated by you to learn more about a specific area of your business. Internal audits are often aimed at helping business owners avoid making financial mistakes or learn how well the organization is trending toward goals. As the name suggests, an internal audit is conducted by someone from inside of your business.
Internal business audits don't just look over your financials. Instead, they can examine virtually every facet of your business to ensure everything is efficiently functioning. If your business has shareholders or board members, an internal audit may be used to keep them updated on the performance of the business.
An external audit is performed by an outside entity or third party, such as the IRS, local tax agency, an accounting firm, or an insurance company. External auditors are required to follow the generally accepted auditing standards (GAAS). In either case, an external audit can vary based on the goal of the procedure. Some external auditors may wish to examine specific aspects of the business operations; while others may need a holistic picture of your company's financial records.
As soon as you receive notice of an IRS audit, you should contact your tax advisor or auditor prior to responding. Why? Because even the simplest letter from the IRS requesting a document may be the first sign of trouble. It's best to trust the expertise of an experienced accountant to craft the proper response.
Did you know auditors can impose fines for poor records? Ideally, you should have your records organized by type and year. Ensure all relevant records are readily available. And in the event a record isn't available, you should never just make them up.
If you have a tax lawyer or an accountant representing your business, you should allow them to answer all of the auditor's questions. And most importantly, you should never volunteer information unsolicited. Simply put, if they don't ask, you shouldn't tell. Your goal is to say as little as possible throughout the audit without appearing as if you concealing information.
Receiving anything from the IRS can be unnerving — even if it's a birthday card. As a result, make sure you carefully read the audit request multiple times. If you aren't crystal clear about the message, make sure you have a tax professional read it as well and provide clarity about what the agency wants. In most instances, IRS letters are nothing more than them requesting additional information. And if they are requesting information, you'll be better suited to work with a tax professional to craft an appropriate response.
Whether it's an IRS audit, internal audit, or any other type of audit, the team at John F. Dennehy can help. We are a team of certified public accountants who are committed to serving clients throughout Long Island.
Contact John F. Dennehy CPA today for audit assistance.
We at John F. Dennehy CPA are a team of certified public accountants who service clients throughout Long Island. The services that we provide are comprehensive, and we can resolve multiple accounting needs for a client.