It’s a phrase that strikes fear into even the most seasoned business owners: “You’re being audited.” But despite the anxiety it provokes, an IRS audit doesn’t have to be a nightmare—especially if you understand what triggers them, what the IRS is really looking for, and how to prepare in advance.
Thanks to increased funding under the Inflation Reduction Act, the IRS is actively ramping up its enforcement efforts—especially toward high-income individuals and larger businesses. According to the agency, audit rates for corporations with over $250 million in assets are expected to nearly triple by 2026. Similarly, audits for large partnerships (those with more than $10 million in assets) are set to increase tenfold.
However, the IRS has emphasized that individuals earning under $400,000 annually and small businesses are not the focus of this increased enforcement. That said, every business—large or small—should still understand how audits work, what records to keep, and how to respond if contacted.
Types of IRS Audits
According to the IRS, there are several types of audits a business might encounter:
- Correspondence Audit
The most common and least invasive. The IRS mails a letter asking for clarification or documentation for specific deductions or entries.
- Office Audit
You are asked to visit a local IRS office to present records and discuss certain parts of your return.
- Field Audit
The most comprehensive and in-depth. An IRS agent visits your place of business to review financial records, interview staff, and evaluate operations.
Each audit type varies in complexity and duration, but all begin with an official letter—not a phone call or text (beware of scams!). You’ll have time to prepare your response, and professional representation can be a huge advantage.
What Triggers an IRS Audit?
Not every audit is random. Some common red flags that may attract the IRS’s attention include:
- Large Deductions: Particularly if they seem disproportionate to your income or industry averages.
- Home Office or Auto Deductions: These often raise questions if not well-documented.
- Owner Compensation: Salaries that are significantly higher or lower than industry norms—especially in S corporations.
- Inconsistent Reporting: A sharp change in income, deductions, or gross profit margin compared to previous years.
- Cash Businesses: Businesses that deal primarily in cash, such as restaurants or salons, are inherently more likely to be audited.
- Schedule C Filers: Sole proprietors who report business income on Schedule C are statistically more likely to be selected for audit due to high rates of error and underreporting.
Being aware of these triggers helps you avoid common pitfalls—and prepares you to explain them if asked.
What to Do If You’re Audited
If the IRS selects your business for audit, you’ll be notified by mail. The letter will explain what part of your return is under review and what the next steps are. The IRS will not contact you initially by phone, email, or text message.
Here’s how to respond:
- Read the notice carefully. Understand what the IRS is requesting—whether it’s documentation for a specific deduction or a more in-depth review.
- Don’t panic. Many audits are routine and resolve quickly with the proper documentation.
- Gather documentation. Collect receipts, invoices, canceled checks, payroll records, and any other materials related to the item under review.
- Work with a tax professional. If you’re unsure how to respond, contact your CPA or tax advisor. They can help organize your response and communicate with the IRS on your behalf.
- Meet deadlines. Respond within the timeframe listed in the notice. Extensions may be available, but you must request them.
Audits typically cover the past three tax years, although the IRS can go back up to six years if they find substantial errors or underreporting.
Recordkeeping: Your Best Defense
According to the IRS audit records guidance, strong documentation is the foundation of audit readiness.
Here’s what you should retain—and for how long:
| Document Type | How Long to Keep |
| Tax returns & supporting docs | At least 3 years (6 errors suspected) |
| Payroll records | 4 years after filing date |
| Bank and credit card statements | 3-6 years |
| Invoices and receipts | 3-6 years |
| Depreciation schedules | As long as the asset is owned +3 years |
Keep everything organized by year and category. Digital records are acceptable, but ensure they’re backed up and accessible.
Why You Should Involve Your CPA Immediately
Your CPA can play a pivotal role in the audit process. Not only can they help interpret IRS notices and prepare documentation, but they can also represent you during the audit itself if they hold the appropriate designation (EA, CPA, or attorney).
Your CPA can:
- Communicate directly with the IRS on your behalf
- Help reconstruct missing records
- Explain the reasoning behind complex deductions
- Ensure your responses align with your legal rights
Having a tax advisor involved sends a signal to the IRS that you’re taking the process seriously—and can significantly reduce the stress of handling the audit yourself.
How Long Do IRS Audits Take?
The audit timeline can vary widely:
| Audit Type | Typical Duration |
| Correspondence Audit | 1-3 months |
| Office Audit | 3-6 months |
| Field Audit | 6-12 months (or longer) |
The IRS typically initiates audits within one to three years after a return is filed. However, if fraud or large errors are suspected, they may look back up to six years.
Once an audit begins, delays can occur if you miss deadlines, fail to provide documents, or require appeals.
Real-World Audit Scenarios
Scenario 1: Overstated Deductions
A small marketing firm claimed unusually high travel and entertainment expenses. The IRS requested receipts for two tax years and disallowed 40% of the deductions, resulting in additional taxes, interest, and penalties.
Scenario 2: S Corporation Salary Issue
An S corp owner paid themselves only $20,000 in salary on $300,000 of income. The IRS flagged this for underpayment of payroll taxes and required back taxes, along with a reasonable compensation adjustment.
Scenario 3: Missing Records
A contractor was selected for an audit and failed to maintain mileage logs for vehicle deductions. The IRS disallowed the entire deduction and levied a fine. Had they kept a simple mileage app or logbook, the outcome could have been avoided.
IRS Audit Myths vs. Facts
| Myth | Reality |
| Only high-income earners get audited | Schedule C filers and cash-based businesses are common targets |
| Audits always mean fraud accusations | Many audits are routine checks, not fraud |
| I can ignore the IRS if I disagree | Ignoring notices escalates the situation – always respond promptly |
| My CPA will handle everything for me | Your CPA helps, but your involvement is still essential |
How to Reduce Your Audit Risk Proactively
While no business can completely eliminate the risk of an IRS audit, there are practical steps you can take to significantly reduce your odds. Here are a few proactive strategies:
- Report income accurately: Always report income exactly as it appears on 1099s, W-2s, or other third-party records. Mismatches are a common audit trigger.
- Avoid estimates or round numbers: Using too many rounded figures (e.g., $5,000, $10,000) can make your return look imprecise or fabricated. Use actual amounts where possible.
- Be cautious with aggressive deductions: Claim only deductions that are well-documented and legitimate. Home office, meals, and mileage deductions are frequent targets of scrutiny.
- Separate personal and business finances: Open a dedicated business checking account and credit card to keep your records clean and easy to audit.
- Use qualified tax professionals: Work with a CPA or Enrolled Agent who knows your industry and IRS expectations. Professional preparation significantly lowers the chance of simple errors.
- Double-check high-risk forms: Schedule C, Form 2106 (employee expenses), and Form 8283 (non-cash charitable donations) are often reviewed more carefully. Attach documentation where recommended.
Implementing these habits makes you less likely to be flagged—and more confident in your return, whether the IRS ever knocks.
IRS Audit Readiness Checklist
Use this quick list to improve your audit preparedness:
✅ Organize receipts and invoices by year and category
✅ Save digital backups of all tax documents
✅ Reconcile bank and credit card statements monthly
✅ Document business use of vehicles and home offices
✅ Review your return annually with a tax advisor
✅ Respond to IRS notices within stated deadlines
✅ Know who in your company handles audit inquiries
✅ Partner with a CPA who understands your business
Staying prepared year-round saves time, money, and headaches.
IRS Audit FAQ
Q: How does the IRS select businesses for audit?
A: Through computerized screening, random selection, and third-party data comparison (like 1099s or W-2s).
Q: Can I request an extension to respond to an audit notice?
A: Yes, the IRS often grants reasonable extensions if requested promptly.
Q: What happens if I disagree with the audit results?
A: You have the right to appeal or go to tax court. A CPA can help guide you through the process.
Q: Can a clean audit lead to a refund?
A: Occasionally, yes. If you overpaid or under-claimed deductions, a refund may result.
Final Thoughts: Audit-Ready All Year Long
Audits may feel stressful, but they’re also survivable—and even manageable—if your business has the right habits and support. The key isn’t to fear the audit. It’s to prepare for it, document well, and respond promptly with the right help.
At Sorren, we help clients prepare, defend, and recover from IRS audits. From reviewing your records to representing you before the IRS, our advisors are here to ensure your tax process is compliant, efficient, and less stressful.
Need help getting audit-ready? Contact Sorren today to learn how we can support your business through every stage of the audit process.
Summary: Be Prepared, Not Panicked
IRS audits can feel intimidating, but with good records, a calm approach, and expert guidance, they’re manageable. Whether your business is selected randomly or based on specific triggers, your ability to respond—and the strength of your documentation—will shape the outcome.
Keep records. Know the rules. And lean on your CPA. If an audit comes knocking, you’ll be ready.
Let Sorren help you navigate the process. Because financial confidence starts with compliance.