As a small business owner in Illinois, one should attempt to always be prepared for an audit from the IRS. Audits can be stressful, but the process is much easier when paperwork is organized and easily accessible. It’s also helpful for small business owners to understand the circumstances that may lead to an audit and to know what information will be required if the business is audited by the IRS.
Understanding a small business audit
Some business owners perform external or internal audits regularly to find any potential issues before they occur. Internal audits are performed by someone inside the company and are done for informational purposes. An independent entity performs external audits, and they are usually done to comply with a legal requirement. An IRS audit, the type usually most intimidating to small business owners, is performed when the IRS finds an issue with a tax return.
An IRS audit may be done through correspondence, where they require documentation from the business, or in a field audit where an IRS representative physically looks through documentation. The chances of facing an audit increase when a business reports high-income levels, claims losses several years in a row or takes multiple deductions. Audits usually only occur from tax returns from the previous three years, but they can go back further in some circumstances.
Preparing for an audit
When a small business owner gets a letter from the IRS informing them of an audit, it’s important to seek legal advice. An attorney with knowledge of Illinois tax law can provide guidance on what to expect and help one prepare for the process. Audits can be nerve-wracking for small business owners but with proper legal guidance, one can prepare all the required documentation.