IRS audit-prep documentation

A. How audits start and how you will be contacted - The IRS and state tax authorities notify taxpayers by mail; they will not initiate an audit by telephone. (IRS) Respond promptly to the letter and follow the instructions exactly.

If you receive a phone call or email claiming to be the IRS, treat it as likely fraud. - Audits may be by mail (correspondence), office interview, or field audit at your business or representative’s office.

Correspondence audits are most common; field audits are more intrusive. B.

Documents and categories you must be prepared to provide (organize by year and type) - Income / Gross receipts: cash register tapes, deposit records, invoices, receipt books, Forms 1099, bank deposits, merchant statements. - Purchases & Cost of goods sold: vendor invoices, purchase orders, canceled checks or proof of payment, PO/receiving records, vendor contracts. - Operating expenses: receipts, credit-card and account statements, canceled checks grouped with bills, invoices that identify payee/date/amount/purpose. - Travel, meals, vehicle: mileage logs, receipts, travel itineraries, substantiation required per Publication 463. - Payroll & employment taxes: payroll registers, Forms W-2/W-3, Forms 941/940, payroll tax deposits, employee timecards — keep at least four years for employment tax records (IRS & Publication 15 guidance). - Assets & depreciation: purchase invoices, closing statements, proof of improvements, depreciation schedules, Section 179 documentation, disposition records. - Legal & corporate documents: formation documents (articles of organization), operating agreement, EIN assignment, member K-1s, bank account reconciliation, loan agreements, leases, contracts, minutes, and documentation of owner/member distributions and capital accounts for LLCs. - Supporting/supplemental documents: canceled checks, bank statements, grant/loan papers, insurance claims, appraisal or valuation records.

C. Retention periods and state variation - Federal general rule: keep records used to prepare return for at least three years after filing (statute of limitations generally three years).

IRS may audit up to six years if substantial omission or more if fraud. (IRS) - Employment tax records: keep at least four years. (IRS) Many states follow similar or longer minimums for specific taxes. - State examples: New York requires keeping records generally for at least three years and allows paper or electronic formats; Texas Comptroller requires keeping records for a minimum of four years and may go back further if fraud or unreported tax is suspected.

State retention periods vary; always check the specific DOR/Comptroller guidance for each state where you operate. D.

Electronic records and originals - The IRS accepts electronic records in many cases (including outputs from electronic accounting systems). Contact the assigned auditor to confirm acceptable formats.

When submitting documents to the IRS, send copies — never mail originals. Keep originals securely. (IRS) E.

How to organize records for fastest resolution - Organize records by tax year and by category (income, COGS, expenses, payroll, assets). Include a one-page summary for each year that explains major items or unusual transactions. - Provide a table of contents or index, and attach summarized reconciliations (e.g., bank rec, gross receipts to deposits).

This reduces auditor time and risk of misinterpretation. F.

Responding to audit notices & timeline tips - Read the notice carefully: it lists the years and specific items under review and how to respond. - For mail audits, you can usually request a one-time automatic 30-day extension (follow instructions on the letter).

For in-person audits, contact the assigned auditor to request more time. - Always request delivery confirmation when mailing documents. Keep copies of everything you send and a log of communications. - If you disagree with proposed changes, you may request manager review, appeals, or mediation (IRS appeals/ADR programs); consider professional representation.

G. Common audit triggers to address proactively - Misstated or unreported income (missing 1099s), large, inconsistent or unusual deductions (sudden spike in advertising or vehicle expenses), repeated business losses, home office claims, misclassified employees vs. contractors, calculation errors, and unusually high contractor payments without payroll.

H. LLC-specific considerations - Maintain clear separation of business and personal finances: business bank accounts, credit cards, and proper bookkeeping. - Keep formation and governance documents: articles/operating agreement, member capital accounts, distribution records, K-1s and basis calculations — auditors will test member distributions and basis substantiation. - If taxed as S corp/partnership, retain S corp election, partnership agreements, and schedules used to allocate income/losses.

I. Practical checklist (for newsletter/blog use) Core checklist to keep (for each tax year, organized and indexed): - Tax returns filed (business & related personal returns) and tax preparer workpapers - General ledger and trial balance - Bank statements and bank reconciliations - Deposit slips and merchant account statements - Sales invoices and receipts, cash register tapes - Vendor invoices, canceled checks, credit card statements - Payroll reports, Forms W-2/W-3, Forms 1099, Forms 941/940, payroll tax deposits - Asset purchase invoices, depreciation schedules, Section 179 documentation - Loan agreements and settlement sheets - Contracts, leases, insurance policies - Mileage logs and travel receipts with business purpose notes - Records of owner/member distributions and capital account ledgers - Legal documents (litigation, settlements), licenses and permits - One-page narratives for any large/abnormal items (explain business purpose)

A. How audits start and how you will be contacted

- Income / Gross receipts: cash register tapes, deposit records, invoices, receipt books, Forms 1099, bank deposits, merchant statements.

463. - Payroll & employment taxes: payroll registers, Forms W-2/W-3, Forms 941/940, payroll tax deposits, employee timecards — keep at least four years for employment tax records (IRS & Publication 15 guidance). - Assets & depreciation: purchase invoices, closing statements, proof of improvements, depreciation schedules, Section 179 documentation, disposition records. - Legal & corporate documents: formation documents (articles of organization), operating agreement, EIN assignment, member K-1s, bank account reconciliation, loan agreements, leases, contracts, minutes, and documentation of owner/member distributions and capital accounts for LLCs.

- For mail audits, you can usually request a one-time automatic 30-day extension (follow instructions on the letter). For in-person audits, contact the assigned auditor to request more time.

- Misstated or unreported income (missing 1099s), large, inconsistent or unusual deductions (sudden spike in advertising or vehicle expenses), repeated business losses, home office claims, misclassified employees vs. contractors, calculation errors, and unusually high contractor payments without payroll.

H. LLC-specific considerations

- Keep formation and governance documents: articles/operating agreement, member capital accounts, distribution records, K-1s and basis calculations — auditors will test member distributions and basis substantiation.

- Payroll reports, Forms W-2/W-3, Forms 1099, Forms 941/940, payroll tax deposits - Asset purchase invoices, depreciation schedules, Section 179 documentation

• The IRS and state tax authorities notify taxpayers by mail; they will not initiate an audit by telephone. (IRS) Respond promptly to the letter and follow the instructions exactly. If you receive a phone call or email claiming to be the IRS, treat it as likely fraud.
• Audits may be by mail (correspondence), office interview, or field audit at your business or representative’s office. Correspondence audits are most common; field audits are more intrusive. B. Documents and categories you must be prepared to provide (organize by year and type)
• Purchases & Cost of goods sold: vendor invoices, purchase orders, canceled checks or proof of payment, PO/receiving records, vendor contracts.
• Operating expenses: receipts, credit-card and account statements, canceled checks grouped with bills, invoices that identify payee/date/amount/purpose.
• Travel, meals, vehicle: mileage logs, receipts, travel itineraries, substantiation required per Publication
• Supporting/supplemental documents: canceled checks, bank statements, grant/loan papers, insurance claims, appraisal or valuation records. C. Retention periods and state variation
• Federal general rule: keep records used to prepare return for at least three years after filing (statute of limitations generally three years). IRS may audit up to six years if substantial omission or more if fraud. (IRS)
• Employment tax records: keep at least four years. (IRS) Many states follow similar or longer minimums for specific taxes.
• State examples: New York requires keeping records generally for at least three years and allows paper or electronic formats; Texas Comptroller requires keeping records for a minimum of four years and may go back further if fraud or unreported tax is suspected. State retention periods vary; always check the specific DOR/Comptroller guidance for each state where you operate. D. Electronic records and originals
• The IRS accepts electronic records in many cases (including outputs from electronic accounting systems). Contact the assigned auditor to confirm acceptable formats. When submitting documents to the IRS, send copies — never mail originals. Keep originals securely. (IRS) E. How to organize records for fastest resolution
• Organize records by tax year and by category (income, COGS, expenses, payroll, assets). Include a one-page summary for each year that explains major items or unusual transactions.
• Provide a table of contents or index, and attach summarized reconciliations (e.g., bank rec, gross receipts to deposits). This reduces auditor time and risk of misinterpretation. F. Responding to audit notices & timeline tips
• Read the notice carefully: it lists the years and specific items under review and how to respond.
• Always request delivery confirmation when mailing documents. Keep copies of everything you send and a log of communications.
• If you disagree with proposed changes, you may request manager review, appeals, or mediation (IRS appeals/ADR programs); consider professional representation. G. Common audit triggers to address proactively
• Maintain clear separation of business and personal finances: business bank accounts, credit cards, and proper bookkeeping.
• If taxed as S corp/partnership, retain S corp election, partnership agreements, and schedules used to allocate income/losses. I. Practical checklist (for newsletter/blog use) Core checklist to keep (for each tax year, organized and indexed):
• Tax returns filed (business & related personal returns) and tax preparer workpapers
• General ledger and trial balance
• Bank statements and bank reconciliations
• Deposit slips and merchant account statements
• Sales invoices and receipts, cash register tapes
• Vendor invoices, canceled checks, credit card statements
• Loan agreements and settlement sheets
• Contracts, leases, insurance policies
• Mileage logs and travel receipts with business purpose notes
• Records of owner/member distributions and capital account ledgers
• Legal documents (litigation, settlements), licenses and permits
• One-page narratives for any large/abnormal items (explain business purpose)