Small Business IRS Audits (What You Need to Know)

What is an Audit?

An IRS Audit is an in-depth investigation of your tax profile by the IRS. The government implemented the audit system to reduce the “Tax Gap,” which is the difference between the money owed to the IRS and the money the IRS actually receives from taxpayers.

What Causes an Audit?

The majority of audits are computer-generated (the IRS relies heavily on computers). The algorithm’s selections may seem random – some are – but many who get selected by the algorithm are individuals who display suspicious activity.  

The IRS National Computer Center compiles your tax return data and generates what is known as a DIF score. The higher your DIF score, the higher the likelihood you are to get audited.

This algorithm that creates your DIF score is highly secretive. However, what we do know is that the higher your Total Positive Income is, the higher your DIF score may be.

For how to appeal, an audit read further here.

Why is the IRS Auditing Small Businesses?

The entire country was negatively affected by the pandemic and lockdowns, with small businesses like mom-and-pop restaurants and retail stores hit the hardest.

Why would the IRS target businesses that are doing poorly?

The IRS routinely passed over small businesses because of the time and effort it took to audit them. But now, that is not the case.

The IRS has hired 50 more auditors specifically for the task of auditing small businesses. These auditors have the power to review returns that are up to three years old – or older if necessary.

Thanks to audit procedures approved by Congress in 2015, the IRS can collect any unpaid taxes they find during the audit. Essentially, the IRS plans to collect as much revenue as possible by targeting taxpayers with back taxes or unfiled tax returns.

Why Does the IRS Need to Collect More Tax Revenue?  

The stimulus checks and other financial aid programs showed us that the federal government is spending more money than it is taking in.

Local governments are in rough shape as well. Before the pandemic, 44 states were already experiencing budget deficits. The government, at all levels, is in desperate need of revenue.

How will they get more revenue? Two things:

1. Increased tax rates, and
2. more IRS collections.

Now that the federal government has let the IRS off the lease, they will collect revenue by going after the lowest hanging fruit – taxpayers with unfiled and unpaid taxes.

What Can You do to Protect Yourself from IRS Audits and Collections?

The worst thing for a taxpayer with back taxes and unfiled taxes to do is nothing.

Even if you are not a small business owner, the IRS will still penalize you with liens, levies or, wage garnishments if you are not compliant.

Instead of burying your head in the sand when the IRS sends you a letter, seek representation from TaxRise. All taxpayers have the right to retain an authorized representative when dealing with the IRS.

With over 1,200 successful resolutions last year, TaxRise has a whole team of certified professionals with years of experience negotiating with the IRS.