Common Government Audits Every Business Should Know
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
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