Three lessons from a tax audit gone wrong

On Behalf of | Oct 24, 2019 | Tax Audits

It all began when the Internal Revenue Service (IRS) notified a relatively small, local business that it would be subject to a federal tax audit. The business cooperated, and the auditor returned findings of serious tax errors. Errors that could result in substantial financial penalties.

The business questioned the findings and, upon further review, could not get the same numbers as the auditor. Seem concerning? It should. The following elaborates on why.

What happened in this audit?

The business, an S-corporation, was successful. It was known to expand regularly, opening new locations throughout the community. The business was run by five shareholders, including a husband and wife who ran the business, a second husband and wife team who founded the business but were not involved in operations and a businessman who also owned other businesses, one of which helped with the construction needs when this business expanded.

The IRS did not explain why it chose to audit the business but sent a federal auditor to conduct a field audit. The auditor requested financial documentation to complete the audit. The business complied. The auditor stated the business’s tax numbers did not add up. Instead of agreeing and moving on, the business reviewed the auditor’s findings. It turned out the error was not theirs, but the auditors. The auditor had used the wrong formulas when calculating the business’s tax obligations.

The business shared its findings with the auditor, pointing out the auditor’s error. Ultimately, the agent completed the audit in the business’ favor.

What can other businesses learn from this case?

There are three important lessons:

  • Any business is at risk of an audit. Random audits happen. Businesses are wise to be prepared.
  • The IRS makes mistakes. In this case, the agent’s error leads to false accusations the business had made erroneous tax filings. Had they not fought back, they could have faced stiff financial penalties.
  • You can fight back. The business did not simply agree, pay a fine, and move forward. They double-checked the auditor’s work and fought back.

The importance of legal counsel, when notified of an audit, cannot be overstated. Anyone can make a mistake, but when it comes to a business audit, the error can be costly. The attorneys at Goldburd McCone are familiar with federal tax audits and can help better ensure your business’s interests are protected throughout the process.