State and federal laws require business owners to file a tax return and report all their profits and losses. These returns must present accurate information for the business and reflect how the company uses its profits. They must account for all money generated each year, and the business owner must present accurate information when using payroll records to show how much they pay their workers. If the company’s tax records are flagged for any reason, the Internal Revenue Service can start an audit. Reviewing rules and laws pertaining to a tax audit educate the business owner about what they can expect.
Get Advice from an Attorney
When business owners are notified about the audit, they could seek the counsel of an attorney to weigh their options. A tax audit doesn’t have to become an overwhelming experience. As long as the company maintains accurate records for their tax returns, they could get through the audit without serious repercussions. The audits enable the Internal Revenue Service to review the tax records and ensure that the business owner paid all tax payments required by the state and federal government. Business owners learn about payroll tax audits by contacting an attorney now.
Getting All Tax Records Ready
Taxpayers are advised to keep tax records for at least the last ten years, and they should place these records in a secure and safe location. It is vital to their tax audit case to how all the information. Auditors review the tax records for inaccuracies. When it comes to payroll taxes, the auditors recalculate payroll files and ensure that the business owner paid their workers according to the law. They must show that there were not any discrepancies in any files that could indicate fraud or other crimes.
Find All Receipts for Previous Tax Returns
Receipts for the business experiences show how the business owner used their profits for the year. All business expenses must be lawful and follow tax laws pertaining to tax deductions. The business owner cannot deduct personal expenses that were not related to their business on the business tax returns. IRS auditors will question each deduction and review the receipts to create a clear picture. For example, a small business owner cannot claim an area inside their home as business-related if the area isn’t just for the business only. They could have to set up a home office that is used for the business and for no other purpose.
Responding to the IRS Letter
All taxpayers receive a letter from the IRS when they are getting audited. A business owner or even an independent contractor has the same thirty days to respond as other taxpayers. If they do not respond to the notification, the IRS will begin proceedings against the taxpayer. The notifications may ask for tax returns or receipts for a specific year, and the taxpayer must respond and present these documents. An attorney helps them manage the tax audit and help the taxpayer create a plan if the IRS renders a decision against the taxpayer.
If the business owner doesn’t have the documents readily available, they could submit a request by mail to get an extension. The longest extension the taxpayer can get themselves is 30 days. A tax attorney reviews all documentation sent to the business owner and creates a plan to manage the audit effectively.
Why Would the IRS Audit a Business?
The most common reasons for a tax audit are sudden and dramatic increases in profits following a year where the profits were more modest and any mismanagement of tax payments for previous years. With payroll taxes, the business owners must maintain accurate and clear records for all employees. They must also manage their unemployment claims properly and without error. Records of unprocessed unemployment claims for the tax year could present serious problems for the business. All these reasons are triggers that could encourage the IRS to audit the company and ensure the business owner has been following tax laws appropriately.
What are They Looking For?
When starting an audit, there are key factors that the IRS auditors are trying to find. To present a case of payroll tax fraud, the IRS must find instances of irregularities in payroll deductions such as taking out too much or miscalculation the deductions for profit. When filing taxes, the business must present a total for how much they paid their workers each tax year. If the auditor finds discrepancies such as a miscalculation in how much they paid their workers, the business owner must repay the difference. This evidence could support a claim of tax fraud.
The business owner must monitor their payroll workers, and they must ensure that the workers manage their workers’ pay properly. If the workers do not withhold the correct amount of money, it presents an inaccuracy. The business owner must also ensure that all workers are classified correctly in the employment files. For example, full and part-time employees are the responsibility of the business owner, and the business owner must manage the employees’ tax payments.
When it comes to independent contractors, the tax laws do not require the business owner to manage the workers’ tax deductions. Independent contractors receive 1099s at the end of the year. When the auditors complete their assessment, the classification for each worker must appear properly. Any errors could lead to serious repercussions for the business owner.
Business owners must act quickly when they are notified of a tax audit. Depending on the reason for the tax audit, the business owner must gather copies of their tax returns and all receipts for each year identified by the IRS. When reviewing the tax audit notification, an attorney helps the business owner determine what documents are necessary. Tax auditors must assess the documents and determine if there is any evidence of tax fraud. Miscalculations that are obviously unintentional could be corrected by repaying the overdue taxes. However, if the company is accused of fraud, they will need an effective legal defense to help them.