What To Do If You Get an IRS Audit Letter: Your Small Business Action Plan

Introduction: Take a Breath

Your heart drops. You open the mail, and there it is, a notice from the IRS. First thought, am I in trouble. Second thought, what now. Take a breath. An audit letter is a request for information, not a verdict. With a steady plan, clear records, and a timely response, most small businesses and freelancers get through it just fine , especially with professional Audit Support Services.

Why This Matters Right Now

Texas businesses have had a busy run, and the IRS has been leaning on data matching and digital screening. More third party forms flow into the system, which means more automated questions when numbers do not line up. Add in common Texas issues, sales tax, franchise tax, mixed personal and business spending during growth, and it is easy to trigger mail asking for clarification. The letter is not personal. It is process. The goal is to confirm that the income, deductions, and credits on your return match your documentation. Knowing how to respond protects your cash, your time, and your peace of mind.

Start With the Basics

• Read the letter slowly. It tells you what tax year is under review, what items are in question, how to respond, and your deadline, usually 30 days for a correspondence audit. The notice number will be on the top right. That number matters if you call or write back.
  
• Note the audit type. Most small businesses see a correspondence audit by mail. Some get an office audit at an IRS location. Fewer get a field audit at your business or your representative’s office. The letter explains which one applies and how to proceed for each.
  
• Do not ignore the clock. Missing the deadline can lead to a Notice of Deficiency, which is a formal assessment that starts the 90 day countdown to petition Tax Court. You want to respond before you are in that lane if you can help it.
  

Answer in Plain English, Step by Step

Identify Exactly What the IRS Wants

Most letters list specific lines or issues, like gross receipts, contract labor, meals, vehicle expenses, home office, or a credit you claimed. Make a short checklist from the letter so you only gather what is needed. You do not have to reopen your entire return unless asked.

Gather Supporting Records

Pull bank statements, credit card statements, invoices, receipts, mileage logs, payroll reports, and any logs or diaries that tie directly to the items questioned. Organize them by year and category, then create a simple summary that totals to the numbers on your return. Clear organization speeds the process and reduces back and forth.

Send Copies, Not Originals

If you mail documents, never send originals. Use certified mail with return receipt so you have proof of delivery. If your audit is in person, bring the copies in a labeled binder and be ready to explain each total and how it ties to your books and bank.

Write a Concise Cover Letter

Reference the notice number, list each issue, state your position, and point to the attached documentation. Keep the tone professional. You are helping the examiner find the truth quickly, which is in your favor. If you need time, call the number on the letter before the deadline to request a short extension.

Choose the Right Venue

If the IRS asked for a lot of records that are hard to mail, you can request a face to face meeting at a neutral site, often your CPA’s office. You have that right. Many owners feel calmer meeting where their books live and where their advisor can help manage scope and questions in real time.

Deep Dive: How to Make Your Case

• Tie everything back to your accounting records. Examiners look for a tidy chain, bank to books to return. If your bookkeeping software can export a general ledger and transaction detail for the categories in question, include it. Label totals so they match your summary and your return.
  
• Recreate missing receipts with secondary proof. If you lost a receipt but the expense is legitimate, back it up with bank statements, invoices from vendors, calendars, and emails showing business purpose. The IRS accepts reasonable reconstructions when primary documents are unavailable, especially for ordinary, necessary expenses, as long as your story and totals make sense.
  
• Vehicle and home office require care. For vehicle deductions, a mileage log with dates, destinations, and business purpose is gold. Fuel and repair receipts alone are not enough. For home office, show square footage, exclusive and regular use, and utility bills to support your calculation. Clarity here prevents long tangents.
  
• Keep it scoped. Answer what is asked, completely, and stop. Volunteering extra issues can widen an audit. If an examiner tries to expand beyond the items listed without cause, it is fair to ask for clarity on scope and relevance, politely and on the record.
  
• Know your appeal window. If you disagree with proposed changes, you can request a conference with the IRS Office of Appeals within 30 days of receiving the examiner’s report. If you wait, the IRS may issue a Statutory Notice of Deficiency, which moves you to a formal petition timeline. Mark the dates so you do not lose options.
  

Texas Specific Reminders

Keep sales tax and franchise tax records organized alongside your federal files. The Texas Comptroller can audit sales and franchise tax, and you are required to keep records for at least four years for state purposes, longer if you did not file when required. If your federal audit touches revenue categories that also drive Texas filings, you will want consistent support across both sets of returns.

Common Small Business Triggers and How to Cool Them Down

• Mismatched income. If 1099s issued to your EIN total more than what you reported, expect a letter. Reconcile all 1099s to your books, then explain any timing or payer errors with documentation.
  
• Large cash deposits. If bank deposits exceed reported sales, the IRS will ask why. Prepare a deposits analysis that separates sales, loan proceeds, owner contributions, and transfers. Match sales to invoices and merchant statements.
  
• Aggressive deductions without logs. Meals, travel, vehicle, and home office need logs or clear business purpose notes. Create and maintain them now. It helps in an audit. It also helps you manage spending wisely.
  

How a CPA Helps Without Taking Over Your Life

A seasoned CPA will translate the letter, narrow the scope, prepare the response packet, and, with your authorization, speak directly with the IRS so you can keep running your business. If a field audit is scheduled, meeting at your CPA’s office creates a calm, organized setting. Many cases close at the agent level with clear documentation. When there is a genuine disagreement, your CPA can coordinate an appeal and keep you on the right side of deadlines. Think of it as air traffic control, steady and methodical, so small bumps do not turn into turbulence.

What If You Are Behind on Books

Clean up before you send. Reconcile the year under review, fix obvious miscodings, and produce reports that tie to bank statements. If you need to rebuild a mileage log or locate vendor invoices, start immediately. A complete, organized response earns credibility and shortens the process. If you cannot finish by the deadline, call and request time. Document the call and note any new due dates the IRS provides.

Your Simple Checklist

• Calendar the response deadline and set reminders one week and two days before.
  
• List each line item the letter questions and the exact documents requested.
  
• Pull bank and credit statements, invoices, receipts, logs, and a ledger detail for those items.
  
• Prepare a one page summary that ties totals to your return and labels each exhibit.
  
• Send copies only, via certified mail with return receipt, or bring copies to your meeting.
  
• Keep a complete copy of everything you submit in a folder labeled by tax year.
  

A Calm Finish

An audit letter feels personal. It is not. It is a request for proof. When you respond on time with clear records, most audits end with minimal changes, and sometimes with none at all. If you want to avoid this stress next year, tighten your bookkeeping, keep receipts and logs as you go, and add a short quarterly check in to catch issues early. If a letter does arrive, you will already have the story on paper, and that is the most powerful way to be heard.

Frequently Asked Questions About IRS Audits

1. Why did my small business get selected for an audit?

Most audits are triggered by automated computer scoring (DIF scores). Common triggers include mismatched 1099 income, excessive deductions relative to income, or large cash deposits that don’t match reported revenue.

2. How far back can the IRS audit my business?

Generally, the IRS audits returns filed within the last three years. However, if they find substantial errors, they can go back six years. It is crucial to keep records for at least seven years.

3. Should I handle the audit myself or hire a pro?

While you can handle it yourself, it is risky. Auditors are trained to find discrepancies. A tax professional (CPA or Enrolled Agent) understands the scope of the audit and prevents you from accidentally sharing too much information that could expand the investigation.

4. What happens if I lost my receipts?

Don’t panic. You can often reconstruct expenses using bank statements, credit card reports, and calendar entries. The IRS accepts “secondary evidence” if it is credible. We help clients rebuild these records regularly.

5. Does an audit letter mean I’m in trouble?

Not necessarily. An audit is simply a request for verification. Many audits result in “no change” to the tax return if you have proper documentation. The key is responding calmly and on time.