How Often Do Small Businesses Get Audited? (And What You Need To Do To Prepare)

How often do small businesses get audited? And should you be concerned that your company might be next?

These are questions that small business owners face at some point in their careers, and knowing the answers might help you avoid a lot of stress and headaches someday. 

You can’t afford to ignore the possibility of an audit and just hope it never happens to you. So this post will help you better understand how often tax audits happen, your odds of receiving one, and how to ensure you’re prepared.

Small Business Audit

In a recent post on “How to Prep For a Business Audit (And Streamline Your Company)”, we talked about different types of audits that you can initiate as a small business owner. We also talked about why they can be a valuable tool to help you grow your company and improve operational efficiency. If you have found this current post first, it would be well worth your time to read that other one too. 

To briefly recap and bring you up to speed, a small business audit is a careful examination of your company’s financial statements and operational policies. Some can be done internally by your staff, and some are done by independent CPA firms (like ours) that offer Financial Audit & Compliance Services. A third category (which we’ll cover in detail in the next section) is audits done by the government to validate claims made by your business on its tax returns. 

Indeed.com has a list of 15 types of audits that can help businesses succeed which includes audits focusing on areas such as

• Financial
• Operational
• Compliance
• Information Systems
• Payroll
• Safety
• HR and Hiring

As you can see, there are many ways that audits can serve your business. However, the type that comes to mind most often is the small business tax audit.

Being selected for a tax audit by the IRS doesn’t necessarily mean that you have done something wrong. They may just want clarification on something they are confused about regarding your return.

Small Business Tax Audit

The words “tax audit” are enough to create an incredible amount of stress for a small business owner. But it doesn’t have to be that way. A tax audit is one that the IRS or another local government initiates. The goal is to verify that your tax return information is accurate. 

In order to do that, they will want to look at your taxable income, losses, deductions, and expenses for the time period in question. That’s why keeping and maintaining good records is important; it makes these kinds of situations so much easier. 

Being selected for a tax audit by the IRS doesn’t necessarily mean that you have done something wrong. They may just want clarification on something they are confused about regarding your return. In fact, many audits are as simple as a letter sent to your business requesting a couple of specific receipts to validate a particular deduction (known as a “Correspondence Audit”).

The kind of audit people picture where you meet face-to-face with an IRS representative is referred to as a “Field Audit.” In this case, you can choose where the meetings occur (your office, their office, or a neutral site such as your CPA’s or attorney’s office) as well as when.

Income tax audits aren’t the only tax audits you may face, either. The Hartford Insurance Company has a good article summarizing 3 additional types of tax audits:

• Qualified Retirement Plan Audit 
• Affordable Care Act Audit
• Sales Tax Audit

Regardless of what type of tax audit you may face, it’s important to make sure you partner with a good CPA with lots of tax services experience well in advance so that you can have a qualified professional in your corner and avoid the stress that comes from being unprepared.

How Often Do Small Businesses Get Audited?

The big question, though, is “How often do small businesses get audited?”

According to WizTax.com, “Recent IRS data shows that they audit between less than 1% to 3% of business tax returns, with corporations and businesses making more than $100,000 being most likely to be audited.” 

The IRS reports that 178.8 million individual tax returns (some of which would include Schedule C attachments for Sole Proprietorships, Partnerships, and LLCs) and 13.4 million business returns were filed in 2023. 

If we only do the math using business returns, you have a 1 in 134,000-402,000 chance of being selected for a tax audit.

Most audits are done based on an internal scoring system at the IRS and not specifically targeted at a particular company unless they spot a discrepancy, math error, or some other activity that doesn’t look right. You can often increase your chances of steering clear of an audit by avoiding the following behaviors:

• Regularly reporting low or negative income
• Large cash transactions (one reason why gas stations tend to be audited more often)
• Low income but high deductions
• Lots of entertainment-related deductions
• Pandemic relief Paycheck Protection Loan participant
• Failure to file or late filing
• Doing business overseas

None of these activities necessarily mean that you have done anything wrong, but they are the things the IRS tends to pay close attention to. 

Small Business Audit Checklist

In the event that you receive notice of an audit on your small business, you deserve to be as prepared as possible so that the event is merely an inconvenience, not an emergency.

Here is a small business audit checklist that you can use:

1. Make sure your financial documents are updated, in order, and easily accessible. (If you’re working with a good CPA, this will already be taken care of.)
   1. Balance Sheets
   2. Income Statements
   3. Cash Flow Statements
   4. Previous tax returns
2. Have written policies and procedures.
   1. Transactions and financial reporting
   2. Privacy and Information Security policies
   3. Employee handbook
3. Establish clear internal control policies.
   1. Account and banking access
   2. Distribution of accounting responsibilities
   3. Account reconciliation process and schedule
   4. Purchase approval rules
4. Backup and secure all of your data. (See also: “4 Good Ways to Keep Your Data Safe.”)
   1. Password policies
   2. Access controls
   3. Multiple layers of backup

We Can Help With Your Next Small Business Audit

As a CPA firm that has been in business for over 40 years with offices all across West Tennessee (Jackson, Dyersburg, Paris, Brownsville, Martin, & Milan), we have seen a lot when it comes to audits.

You may or may not face a government-initiated tax audit, but if you do you deserve to be ready. Our team of accounting and business pros can help. Schedule a call today to make sure you’re prepared!

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