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IRS Audits Explained for Small Business Owners

Before responding to an IRS audit letter, first identify the following five things: the taxpayer, revenue agent, tax years audited, triggering issue(s), and the deadline.
As a small business owner, you may be wondering what the process is for an IRS audit. An IRS audit is when IRS reviews your tax return to ensure that you have reported your income and expenses correctly. The founder of Milikowsky Tax Law, John Milikowsky, breaks down the process of an IRS audit for small business owners. Check out the video below for more information:
In this article, we will review the various stages of an audit as well as information you can obtain from IRS during an audit to ensure that your tax return is correct. 

The IRS Audit Process

The process of an IRS audit can feel overwhelming for a small business owner. However, it doesn’t have to be. Let’s take a look at each step of the process.

The Audit Letter

An IRS audit starts with an audit letter that is generally sent to the business owner or taxpayer. This letter will include:
  • The name of the assigned revenue agent
  • The telephone number and fax number of the revenue agent
  • The number of days you have to respond to the revenue agent
Business owners should pay careful attention to the number of days they have to respond to the revenue agent. This is important in continuing the audit process efficiently and cooperating with IRS. 

What If You Need More Time to Provide Information to IRS?

It is important to respond to the audit letter, even if just to request more time. If you do need more time, you can request an additional 30 or 60 days. Typically, they’ll give you 30 days to respond, have an interview, and meet.  During this time, you will want to consider hiring a professional to help guide you through the audit process.

Consider Hiring a Tax Attorney or CPA

As you collect information for IRS, you can choose to enlist the help of an experienced tax attorney or a CPA. We’d recommend a tax attorney because any communication you have between your attorney is protected under attorney-client privilege, whereas it’s not protected by any other tax professional or CPA. 

Initial Document Request

If you’re being audited by IRS, one of the first things they’ll do is send you an Initial Document Request (IDR). This request will list all of the documents and information that the revenue agent needs in order to complete the audit.  If you don’t provide this information, IRS can summon the information. For instance, if you don’t provide your bank statements, IRS can go directly to your bank to obtain them. If this occurs, within 30 days, IRS can obtain your bank statements, canceled checks, and deposited items. 

Second Initial Document Request

After you respond to the IDR, IRS will have another discussion. If IRS does not feel that they have all the information they need or if you failed to provide all requested information, they can issue an additional Initial Document Request. This process can continue with as many document requests as they need based upon the number of alleged issues on your tax return. And if they don’t feel that you provided all the information, they’ll issue another IDR, typically IDR Number Two, and it could go up to as many IDRs as they need based upon the number of issues that they’re looking at on your tax return. 

Interviews With the Taxpayer

After you provide all necessary information to IRS, they will typically conduct an interview. At Milikowsky Tax Law, we attempt to schedule the interview at the end of the audit or not have one at all. That being said, sometimes it is an unavoidable step in the process. 

An Interview May Come With a Summons

If IRS wants to interview you and it is an important part of their audit, they can submit a summons. If you disregard this summons, IRS can file an action in the federal court to require you to appear and provide the documents or any other testimonial information. This step depends upon how important an interview is to resolve the audit.

Revenue Agent Report

After the business owner and IRS have exchanged information through the audit letter, IDR(s), and an interview, taxpayers will typically receive a Revenue Agent Report (RAR). The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings.  Additionally, the Revenue Agent’s Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.” Learn more about how to read a Revenue Agent Report, here.

Audit Conclusion: Respond to the Revenue Agent Report

Typically, a business owner will have 30 days to respond to the Revenue Agent Report. It might be less time, especially if there have been multiple Revenue Agent Reports. Taxpayers have the right to disagree with a revenue agent’s report. If taxpayers disagree, they can challenge the agent’s findings through:
  • A formal protest to the IRS Office of Appeals division by appealing to the U.S. Tax Court, or
  •  Paying the new assessment and then suing for a refund.
If the Revenue Agent’s Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our team of experts at Milikowsky Tax Law. We have over a decade of experience working with IRS audits and are experts in defending business owners in the face of IRS or other government agency audits. Have more questions about IRS audits? Check out our full guide, here.