How many times can the IRS audit your business?

Editor’s note: Every person (and business) fears the IRS will come knocking on their door—more than once. But is that fear realistic? How many times the IRS can audit you depends on a few factors. Read this case and get insights on how to avoid getting in double trouble.

Consider this scenario: Zach is a small business owner based in Kansas City. He incorporated his business in 2019. In the first few years of operation, he took the advice of an inexperienced tax preparer and his 2018 tax return was audited by the IRS. Since the audit, he has worked with the IRS to reconcile his return and now takes every measure to comply with IRS best practices.

Yet, Zach continues to question the IRS’ repetitive audit policy. Read on to find out the answer…

If you get audited once, will you get audited again?

Well, Zach won’t have much comfort in that regard. The IRS can audit him year after year. Tax law limits the IRS from subjecting a taxpayer to unnecessary examinations. 

Our own tax experts at The Tax Institute state, “The IRS can conduct only one inspection of a taxpayer’s books and records for any given year unless the taxpayer requests a second inspection or the IRS notifies the taxpayer in writing that an additional inspection is necessary.”

… especially when a return has multiple red flags, which are mentioned as you read on.

How many years can you get audited for taxes?

Wondering what the answer is to the question, “how many years can you get audited for taxes?” There is no limit for the number of business audits in your lifetime. It depends on your situation.

What happens if you’re audited by the IRS several years in a row?

Can Zach be audited by the IRS for his 2018 return after being audited for the same issue (not his Schedule C business) with minimal changes on his 2016 and 2017 returns?

As soon as Zach receives the IRS notice explaining that he is being audited again, there are a number of things he should do. (We’ve listed those below.) But, if you’re in Zach’s shoes, you should set your mind at ease and contact us. Don’t want to tackle audits by yourself? At Block Advisors, our small business tax pros understand the stress of having your business audited, and, more importantly, we know how to help, so you don’t have to take the following steps alone. For this year’s return, if you receive an IRS notice, our team at Block Advisors can review, research, and respond on behalf of your small business by adding Business Tax Audit Support to your return for $75.

Request that the IRS discontinue the audit (using the contact information on the notice received).

He should reference the IRS’ repetitive audit policy in his request. When he makes the request, he should be aware that the IRS is going to ask for certain information to help determine whether the repetitive audit policy applies. The IRS will generally request:

• The prior year’s audit report or no-change letter
• Verification of where Zach filed the return(s) in question
• Verification of where the IRS completed the prior-year examination(s)

If Zach makes the request before his first scheduled meeting with the examiner, the IRS will generally determine whether the policy applies before any meetings begin.

Best practices to avoid an IRS audit

There are a few red flags the IRS may be looking for.  If you can avoid these, you may reduce the likelihood of multiple audits year after year. Your chances of getting audited as a business is higher if:

• You report income information that doesn’t match your payee statements (like W-2s or 1099s)
• You show deductions on your business tax return disproportionately large to your income
• You are a cash business owner who reports a substantial net loss on a Schedule C
• Your charitable non-cash donations are over $500 and are disproportionate to your overall taxable income
• Your business runs at a loss for several consecutive years
• You have large business write-offs for your automobile, entertainment, business travel expenses, and food—especially if the amount seems too high for the business or profession

Partner with the right tax pro for help with an audit

It’s easier and less stressful to stay ahead of the curve and get professional help from someone who has experience with small business taxes. But, remember, not all tax professionals are cut from the same cloth. In fact, you can vet a handful of tax pros by asking them specific questions.

While there are many options out there when it comes to tax preparation and year-round tax and business services, consider Block Advisors, where our tax pros have an average of 12 years of experience.

Don’t want to tackle taxes (or an audit) yourself? Let our small business tax pros help, so you can get back to what you love.

Make an appointment.