This year, the IRS will audit hundreds of thousands of tax returns. One in 100 businesses will be audited.
The easiest way to survive a tax audit is to be prepared in advance.
The purpose of a tax audit is to verify items reported on a tax return. The government normally will conduct an audit within three years of a return being filed, and often the audit will begin more than a year after you file your tax return.
Tax Audit Preparation
At Smith Patrick CPAs, we recommend that you maintain ongoing documentation for all items to be reported on your tax returns, including:
- Cancelled checks
Make sure to keep all your records in one place.
Tax Audit Cautions for Missouri Cannabis Facilities
As we’ve worked with Missouri cannabis facilities, it’s important to note that the audit rate for cannabis companies is higher than that of traditional companies.
What causes higher audit rates?
- Cannabis businesses are cash intensive, which is considered high risk by the IRS.
- In states where marijuana is legal, the cannabis operators are easily identifiable.
When high risk businesses are combined with being easily identifiable, it equals higher risk of being audited.
At Smith Patrick CPAs, we always advise good recordkeeping, but with high risk businesses like cannabis operators, it’s especially important.
CPA Representation for Tax Audits
Even if you prepared your own tax return, it is often advisable to have a tax professional represent you at an audit.
The scope of an audit depends on the complexity of the return being examined. A return reflecting business or real estate income and expenses is likely to take longer to audit than a return reflecting only salary income.
Your CPA representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. The typical IRS agent is experienced and knows the job. But IRS is focused on their agenda. A CPA firm representing you is your advocate and is focused on the best outcome for you.
For example, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow the deduction of a certain type of expense) even though courts and other authorities have expressed a contrary opinion on the issue. Because your CPA representative knows the issues and the prevailing opinions, they can point to the proper authority, and the IRS agent may be forced to concede on that point.
Be prepared with strong recordkeeping. If you’re facing an audit, seek accounting representation. Be aware of your risks for being audited, and plan ahead with tax advice and processes that support documentation.
For guidance on recordkeeping and representation for tax audits, reach out to us at Smith Patrick CPAs. We support individuals and businesses and are knowledgeable in cannabis industry accounting and tax rules. Call us at 314-961-1600 or schedule directly here to discuss your situation.
David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He is involved in the cannabis industry in Missouri through MoCannTrade and other organizations, helping cannabis operators with their tax and accounting needs. Reach him at 314-961-1600 or schedule directly here.
About Smith Patrick CPA
Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.