Most small business owners will never face a full IRS audit. But those who do are often blindsided—not by the audit itself, but by how unprepared they were for the process. Preparation and good records are the two variables you can control.
What Triggers a Small Business Audit
The IRS uses statistical analysis to identify returns that deviate significantly from industry norms. Unusually high deductions relative to income, inconsistent income reporting across multiple forms, large charitable contributions, and cash-intensive businesses all receive elevated scrutiny. Home office deductions and auto use deductions are also common triggers.
The Three Types of IRS Audit
A correspondence audit is conducted entirely by mail and is the most common type. An office audit requires a visit to an IRS office with specific documents. A field audit involves an IRS agent visiting your business and examining your books in person. The vast majority of small business audits are correspondence audits.
What to Do When You Receive an Audit Notice
Do not panic. Read the notice carefully—it will specify exactly what the IRS is questioning. Contact a CPA or tax attorney before responding. Gather all documentation related to the questioned items. Respond within the time frame specified, and do not provide more information than is requested.
Key Takeaways
- Most small business audits are correspondence audits—less scary than they sound.
- Unusually high deductions relative to industry norms are the most common trigger.
- Never respond to an audit notice without reviewing it with a CPA or tax attorney first.
