Most Common Types of Government Audits

IRS Audits (Federal Tax Audits)

Correspondence Audit

• Conducted by mail.
• Usually focused on a specific item (e.g., missing 1099s, questionable deductions).
• Least invasive.

Office Audit

• Conducted at an IRS office.
• Involves a deeper look at specific parts of the return.
• Requires the business owner to bring documentation to support the claimed items.

Field Audit

• Conducted at the business location or the taxpayer’s accountant's office.
• Most comprehensive type.
• IRS examines books, records, operations, and business structure.

Common State Tax Audits

Income Tax Audit

• Similar to an IRS audit, but conducted by the state’s Department of Revenue or equivalent.
• Reviews state income tax returns and potential discrepancies.

Sales and Use Tax Audit

• Common for businesses that sell goods or taxable services.
• Ensures proper collection and remittance of sales tax.
• May also look at use tax for out-of-state purchases.

Payroll Tax Audit

• Examines state employment taxes (unemployment insurance, state withholding).

What Can Trigger These Types of Audits?

• Large discrepancies between reported income on state and federal returns
• Underreporting of income (e.g., cash-heavy business, missing 1099s)
• Consistently reporting losses over multiple years (especially if the business looks like a hobby)
• Discrepancies in payroll filings or failure to remit taxes
• Sudden spikes or drops in income without explanation
• Deposits in bank accounts exceed reported income

Tips to Avoid or Prepare for Audits

• Keep clear, accurate, and up-to-date financial records
• Be honest about your income and expenses
• File all required returns on time
• Classify workers correctly (W-2 vs. 1099)
• Maintain proper documentation for deductions and credits
• Stay compliant with state-specific tax and labor requirements