Receiving a tax audit notice from the IRS or the NJ Division of Taxation is stressful, but the outcome depends largely on the quality of your records and how you respond. Most small business audits are correspondence audits (a letter requesting specific documentation) rather than in-person examinations. Greg Monaco, CPA handles audit representation for NJ clients, from reviewing the notice and gathering documentation to communicating directly with the examining agent on your behalf.
Receiving an audit notice is stressful, but manageable, especially with good records.
What Types of IRS Audits Should NJ Small Businesses Know About?
Correspondence (letter asking for documentation, most common), office (you go to IRS/NJ office), and field (agent comes to you, least common for small businesses).
What Are My Rights During an IRS or NJ Audit?
Professional treatment, to know why info is requested, to appeal findings, and to have CPA representation.
How Should I Respond to an IRS or NJ Audit Notice?
Don’t panic. Read the notice carefully. Gather only what’s requested. Contact your CPA immediately. Respond by the deadline. Don’t volunteer extra information.
How Can I Prevent a Tax Audit in the First Place?
Organized records, monthly reconciliation, substantiated deductions, timely filing, and CPA review before filing.
Key Takeaway
The single best thing you can do if you receive an audit notice is contact your CPA before responding. Read the notice carefully, note the deadline, and let your CPA assess the situation and prepare an organized response. Do not call the IRS or NJ Division of Taxation on your own, and do not volunteer information beyond what is specifically requested.
Related reading: IRS Audit Red Flags | Received an IRS Notice? | How Long to Keep Records | Tax preparation services
## Frequently Asked Questions
How does the IRS select NJ small businesses for audit?
The IRS uses a computer scoring system called the Discriminant Information Function (DIF) that compares your return to statistical norms for similar businesses. Returns with high deductions relative to income, consistent losses, unreported 1099 income, or large cash transactions score higher and are more likely to be selected. Random selection also occurs but is less common.
What is the difference between a correspondence audit and a field audit?
A correspondence audit is conducted entirely by mail. The IRS sends a letter requesting specific documentation for specific items on your return. A field audit involves an IRS agent visiting your place of business or your CPA's office to review records in person. Correspondence audits are far more common for small businesses and are generally limited in scope.
Can my CPA represent me during an audit?
Yes. A CPA with a valid license can represent you before the IRS under Circular 230. Your CPA can communicate directly with the examining agent, prepare and submit documentation, and negotiate on your behalf. In most cases, you do not need to interact with the IRS directly. Power of Attorney (Form 2848) authorizes your CPA to act on your behalf.
How far back can the IRS audit my NJ business?
The IRS generally has three years from the filing date to audit a return. This extends to six years if gross income is understated by more than 25%. There is no statute of limitations for fraud or unfiled returns. NJ follows similar timeframes. For most NJ businesses, keeping records for seven years provides adequate protection for both federal and state audit purposes.
