My wife and I run a small business (just the two of us). While we have nothing to hide (doesn’t everyone say that? ), I know that small business owners are at significantly higher risk for audit vs. the general population. I’d like to be as prepared as possible, should such a situation occur…what sort of things will an auditor need to see? Will they want to see every receipt for every deduction (there are hundreds or thousands, many in email)? Or do they just want a general gist (i.e., look at a few at random)? What else will they do?
I was audited once, many years ago. They chose one area, medical deductions, and asked to see all documents relating to that. I think that’s a lot more common than an complete audit where they look at everything, although they can look at everything if they want.
If you have office space in your home and use that as a business deduction for example, they may want to see justification for that.
I think alot of it depends on YOU. About 15 years ago my dad’s business was audited. They set up shop in his store for THREE days to go through everything. They asked him questions like “Do you keep large amounts of cash at home?” When he asked what they meant by ‘large amounts’ they responded “Like drawers full of cash, shoeboxes stuffed with money, closets filled with money, that kinda stuff” My dad responded that his business was being audited not his personal life. At one point they asked why he was so nervous around them and he came right out and told that that he scared that if he maeks a joke over the phone and they misunderstand it he might owe them money. I guess they were pretty rude. Between these two questions and more like it he told them from that point on they were not allowed to talk to him. All further correspondence of any kind was to be in writing and he would have his attorney and/or CPA respond in writing within 24 hours.
OTOH a friend of mine that owns a small restaurant and does all his own accounting was just audited. It took 45 minutes and he ended up oweing $15 (because he put something or other in the wrong year, so he WOULD have wound up paying the $15 the next year anyways).
So yeah, alot of it depends on you.
BTW when my dad got audited they were auditing ALOT of people that were of his heritage and in his specific business which may have had alot to do with why they were so rude. They were just assuming that he cheating his taxes, or that the store was a front for something else. Which he wasn’t and it wasn’t.
When I was an independent contractor a few years ago, I got a full blown Schedule C audit. They wanted to see everything. I submitted all of the requested information by mail since I want working in a city away from my home, so I never actually had to go to the IRS office. After many hours at the copy machine and a single round of questions that were answered with more receipts and logs, they asked for about $200 more. :rolleyes:
The total time involved was about 6 months from the time I got the letter to the letter assessing the additional taxes which closed out the audit.
In retrospect, it wasn’t too bad, but I definitely got that sinking feeling when I first opened the audit letter.
My understanding is that they will generally look at one thing for one year. If they feel that something isn’t right, they can open it up to other things and other years. For example, if they think that there is fraud on last year’s Schedule C, they’ll want to look at Schedule Cs for previous years.
My mom was audited on her personal taxes several years ago. She went to the IRS offices with all of her documentation and it ended up that she made an error in the IRS’s favor and made some money on the deal. It was only like $30 though.
Maybe twenty-five years ago my dad was audited. He had invested in something that was supposed to be a tax shelter but it really wasn’t. They just sent him a letter saying that X isn’t allowed so please send us Y more dollars.