IRS Ramping-up Audits of Small Business Entities
Audits of businesses are much more extensive and intrusive than those for individuals. Should your business be audited, you can expect that every bank and checking account that you have in your household will be taken into consideration. The auditor will be looking for “unreported income”.
The IRS believes that most small businesses do not report all of their earnings. In addition to the audit of your records, they have developed another type of audit that has nothing to do with your recordkeeping or proof for your deductions. We call it a “life-style audit”. This is where the IRS compares your lifestyle and the amount of income that you reported on your tax return to the averages for the local area in which you live.
Whatever “discrepancy” the IRS “finds” will result in more taxes to you, unless you can prove them wrong. This “phantom income”, whether real or imagined, becomes taxable. The IRS will also add penalties for “inaccuracy” to your tax bill. What makes matters worse is that they will often do this for all three open years under the statute. This can get expensive in a hurry.