Any small business owner would go to great measures to avoid a tax audit. Although the possibility of being audited is relatively low, you can’t afford to be ill-prepared. If the IRS does decide to audit you, there is very little you can do to stop it.
Even so, auditing standards and procedures can be confusing, and any tax law changes put into effect each year can make it hard for most companies to stay up-to-date.
Besides, there are misconceptions about which tax forms to use, what dates to file, how much to pay, and whether you’ll owe additional tax or get a tax refund … it can all be frustrating.
In the past, small companies relied on simple bookkeeping or internal accountants to assist in preparing and adjusting journal entries, reconciling accounts, and writing financial statements. But the increase in regulatory requirements has only served to muddy the waters about why one small business is audited and another is not.
An audit committee at the United States IRS office uses a computer program called the Discriminant Function System (DIF) that analyzes returns and red flags them on an auditor’s report if they are outside statistical norms. When a return receives a high DIF score, an agent reviews it to determine if it should undergo an audit — thus, triggering the audit process.