What Happens When a Business Gets Audited?
Navigate the business audit process with clarity. Understand what to expect, prepare effectively, and manage the review of your financial records.
A business audit involves a thorough review of a company’s financial records and information. This process aims to verify the accuracy of financial statements, ensure compliance with applicable laws and regulations, and assess operational efficiency. Audits are a standard component of the financial landscape for businesses, providing a mechanism for independent verification of reported financial health. Understanding the process can help businesses navigate it effectively.
Receiving the Audit Notification
The initial step in a business audit typically begins with receiving an official notification from the auditing authority. This communication is often delivered through certified mail, requiring a signature to confirm receipt. The letter usually specifies the auditing agency, such as the Internal Revenue Service (IRS) or a state tax department, and clearly identifies the tax period or periods under examination.
Notifications also indicate the type of audit being conducted, which can vary in scope and location. A correspondence audit is the least intrusive, handled entirely by mail, while an office audit requires the business owner to bring records to the auditor’s office. A field audit is the most comprehensive, where auditors visit the business premises to conduct their examination. The notification letter generally includes an initial list of documents and information the auditor wishes to review, providing the business with an early understanding of what will be needed.
Preparing Your Records
Once an audit notification is received, the next step involves gathering and organizing all relevant financial records and documents. This preparation helps ensure a smooth audit process and substantiates the business’s financial activities. Common documents requested include bank statements, general ledgers, income statements, balance sheets, and detailed payroll records.
Businesses should also compile all expense receipts, sales invoices, purchase invoices, and any relevant contracts or agreements. These documents are necessary to verify reported income, substantiate deductions claimed, and confirm the accuracy of financial transactions. For instance, expense receipts validate business expenditures, while invoices support revenue claims and cost of goods sold. Organizing these records efficiently, perhaps chronologically or by category, can significantly streamline the auditor’s review. Maintaining both physical and digital copies, if applicable, can also aid in accessibility.
The Audit Examination
With records prepared, the audit examination phase begins, focusing on the interaction between the business and the auditor. During this phase, the auditor systematically reviews the submitted documents, which can include financial statements, transaction records, and supporting evidence.
The auditor’s role involves verifying the accuracy and completeness of the financial information provided, often by cross-referencing different documents and records. They may ask clarifying questions about specific transactions, accounting practices, or discrepancies they identify during their review. Auditors may request additional information or documents if their initial review raises further questions. Communication during the examination typically involves direct interaction, whether through written correspondence, phone calls, or in-person meetings.
Communicating Audit Results
Following the examination, the auditor compiles their findings and formally communicates the audit results to the business. This communication typically takes the form of an audit report or a proposed adjustment letter. This document outlines the auditor’s conclusions and any proposed changes to the business’s tax liability or financial records.
The possible outcomes of an audit vary, ranging from a “no change” result, indicating that the submitted information was accurate and compliant, to proposed adjustments. These adjustments could include additional tax due, a refund, or a finding of non-compliance with specific regulations. The report details the specific issues identified, the rationale behind any proposed changes, and the calculations leading to the adjusted amounts. Businesses are then given a specified period, often 30 days, to review these findings and either agree with the proposed adjustments or indicate their disagreement, initiating a potential dispute process.
Challenging Audit Decisions
If a business disagrees with the auditor’s findings, there are established procedural actions available to challenge the audit decisions. The initial step typically involves requesting a conference with the auditor’s immediate manager to discuss the disagreements and attempt to resolve the issues at a lower level. This informal discussion can sometimes clarify misunderstandings or lead to an agreeable resolution without further escalation.
Should a resolution not be reached with the auditor’s manager, businesses can pursue formal appeal options within the auditing agency. For federal tax audits, this involves appealing to an independent appeals office within the IRS, which is separate from the examination function. This process usually requires submitting a formal written protest outlining the factual and legal basis for disagreement. If an agreement still cannot be reached through the administrative appeals process, the business may then choose to pursue the matter in tax court, which is a judicial forum for resolving tax disputes. The specific procedures for each level of appeal, including deadlines for filing protests and attending settlement conferences, are clearly defined by the respective auditing authorities.