Before you owned your own business, tax season came with its complications. Now, with a new company, your taxes likely became even more difficult. There are many pieces to the puzzle, and it can be hard to know if everything is correct when you send it into the IRS.

While some audits are triggered because of an error, there is also the chance that your business will face a random audit. In either case, the idea of facing that first audit can be terrifying. You may be especially nervous if you have never faced any type of audit.

Here’s what you should think about when your business is facing its first audit.

Types of audits

Movies and TV might lead you to believe that an audit will always consist of an IRS agent coming into your place of business and digging through everything you have. While that is one type of audit, there are other types as well, including:

  • Correspondence audits. The only communication you may have with the IRS is through letters exchanged to verify information. This is most common when there is an error the IRS is trying to reconcile.
  • Office audits. The IRS may ask you to bring certain documents with you to the IRS office where you will go through them with an agent.

Reviewing the list, and checking it twice

Before the audit happens, you will get a letter from the IRS letting you know what kind of audit is coming. You may also get a list of documents or way to prepare for the audit. Go through this list carefully to make sure you are ready.

When the IRS agent looks at your documents, they will look to see if they are present and organized. You can face penalties during an audit for poor recordkeeping. Receiving notice that an audit is your opportunity to make sure your records are in order.

If you feel like your documents could use more organization, organize first by date, then by type.

Flags to watch for

There are a few red flags that will give the IRS reason to look more carefully at your business, including:

  • Home businesses. People who run a business out of their home tend to look for extras to deduct in the name of the business. If you run your business out of your home, be sure that anything you have deducted as being part of the business is, for the company.
  • Multiple years of business losses. The IRS will want to see that your business is more than just a hobby and that you are trying to make a profit.
  • Cash businesses. A business that runs entirely on cash is legal, but it raises suspicion because it is easy to “under-report” your income.

No matter what your situation, when you receive the letter that your business is going to face an audit, you will want to call in support. One of the first people to call will be the person who prepared your tax return. You should also seek help from legal counsel. These are professionals who understand how the audit process works. They can walk you through the process and let you know what you can expect.