There are few words that can strike fear in the heart of a business owner like, ‘IRS audit’. But the truth is that the chances of a typical small business owner in Utah being audited or investigated by the IRS is fairly low. According to the current IRS Data Book, the IRS processed over 141 million returns and only about 1% of individual taxpayers were audited in the 2019 Fiscal Year (FY). The odds only slightly increased to around 2.5% for small businesses.
With that said, if you or your business are facing an IRS audit or investigation, don’t panic. We will break down the different types of IRS audits and provide you with a list of potential audit triggers so you can determine for yourself if you need expert help. Learn more about minimizing tax liability here.
Is your Utah Business being audited by the IRS? How bad is it? If you’re unsure about where you stand with the IRS, it’s time to call an experienced Utah tax attorney. For 15+ years Eric Froisland has been a trusted ally for Utah business owners facing tax issues with the IRS. Call Froisland Law today at 801-290-2130 for your free, no-obligation consultation.
What is an IRS Audit?
An audit from the IRS is initiated when an individual or business income tax return is flagged with a filing discrepancy or has the misfortune of being randomly selected. Depending on the type of audit, you’ll be required to give additional information or face a more in-depth review of your financial information and accounts.
An IRS representative’s job, during an audit, is to determine if the information reported on your tax return is correct and in accordance with all applicable tax laws. Any error, intentional or not, can result in an increased tax bill and/or costly fines and penalties. If you’re facing a Utah state audit or federal audit from the IRS, consulting your trusted bookkeeper, accountant or a skilled local tax attorney to give you and your organization a significant advantage.
The Three Types of IRS Audits
The IRS has three distinct types of audits that vary in complexity and severity, depending on the tax information you filed. The type of audit initiated can be triggered by a number of different factors that might include a simple typo, math errors, or disproportionate income and deduction amounts. From a minor mail audit to an extensive field audit; all IRS audits will all adhere to a defined set of guidelines for each, so you will know what to expect and how you should prepare.
#1 Correspondence Audit
A correspondence audit (also known as a mail audit) is the most routine audit, making up over 75% of all IRS audits combined. This type of audit will likely be a simple request to validate your information or provide additional documentation. You will be required to respond by mail within a given time frame.
* All three types of IRS audits are initiated by mail; you will not be notified by phone or electronically.
#2 Office Audit
An office audit is just that – a pre-scheduled, in-person meeting at an IRS office. This type of audit will cover the issues identified by the IRS to the taxpayer within the audit notice you receive by mail. *Pro tip: arrive on time and be prepared with every document the IRS requested.
At an office audit meeting, the auditor will conduct an interview and review your tax records and other documents requested by the IRS. Their job here is to ensure that your reporting is compliant with all federal tax laws and to make sure your accounting is accurate (yes, the IRS will be checking your math).
#3 Field Audit
Generally reserved for businesses, a field audit is considerably more serious than the other two audit types. An interview will be scheduled at your place of business, an accountant’s office or at your home. The number of times you will have to meet with the auditor will depend on how readily available your financial information is.
Additionally, this type of audit may also include a close look at your claimed income vs. your personal lifestyle and business activities. Any discernable inconsistency will raise a red flag for further investigation. *The IRS is alerted to most tax evasion cases as a result of unreconciled discrepancies found in a field audit.
If you or your organization are facing a tough IRS audit or tax evasion investigation, do not hesitate to call an experienced tax lawyer. Froisland Law will be at the table with you to meet the IRS head-on and find the best resolution for your tax issues.
An audit is not the only way the IRS questions misaligned tax return information. Nearly four million CP2000 notices are automatically sent to tax filers every year. Only those with a discrepancy between reported income and an income statement received from an employer, or from another source like Form 1099 or Form W-2, will receive a CP2000 notice.
Top Mistakes That Can Trigger an IRS Audit
There are a wide-range of different things that can trigger an IRS audit; from an innocent typographical error to an obvious no-no like lying about income or deductions on your tax return. Here are the top five mistakes business owners make that can trigger an IRS audit:
- High Income Reported on a Schedule C – any Schedule C sole proprietorship with a high income reported will most certainly draw IRS scrutiny due to concerns about blurred personal and business expenses.
- Low Salary for Shareholder-Employees – S-Corp businesses must be careful to include acceptable compensation for shareholder-employee salaries that reflect the job position, profitability and company size.
- Large Cash Transactions – the IRS has their own methods for determining the ‘normal’ amount of cash transactions in your industry, relative to other reported income.
- Excessive Deductions & Expenses – claiming deductions that are often misused may raise a red flag include the home office deduction, vehicle deduction, and travel or meal deductions. The IRS has their own calculations to determine acceptable expenses for any particular industry and tax bracket (but they don’t publish that information).
- Shortcuts & Mistakes – while shortcuts & mistakes may not seem like a big deal, they may come across as careless tax preparation and that will alert the IRS. Too many errors may very well lead to an audit that will inevitably lead to a deeper look into your organization’s financial situation. It’s best to be careful and thorough when filing your income tax return and avoid any unnecessary attention by taking risky shortcuts.
Contact an Experienced Utah-Based Tax Attorney
Froisland Law is located in the Salt Lake Valley and works with all Utahans from St. George to the Wasatch Front. Experienced attorney, Eric Froisland is an advocate for individuals and organizations being audited by the IRS in Utah. Eric will review your case, address your tax situation and work with you to develop a solution with the best possible outcome. Call Froisland Law today at 801-290-2130 to schedule your 20-minute confidential consultation with no cost or obligation.