What is an IRS tax audit?
It is carried out by the local tax office and the main purpose of such an audit is to make sure that a company has submitted correct information about its income/expenses and keeps the requirements of local tax laws. That is, they check the numbers and look for discrepancies between actual figures and reported data.
If all your data is correct, you have not hidden anything, and you conduct your business honestly, you have nothing to worry about an income tax audit. It’s okay for you to pass such a check and there will be no problems. But if you deliberately hide part of your income, your business may be fined based on the results of the audit. But, it is worth noting that those people who do not suspect anything about their violations also are fined. For example, due to errors in the compiled documentation.
What is it for? Government agencies carry out income tax return audits to eliminate the difference between what a taxpayer actually received from a taxpayer and what he or she files on the tax return. Such audits can be scheduled, or they can be initiated if the tax service has noticed suspicious activity on the part of the business being audited.
These are the most significant situations that could lead you to an IRS audit.
When is an IRS audit carried out?
- In case of errors and inconsistencies. Despite the fact that the tax return is a very important document, people fill it out, so errors occur, even after the 2nd, 3rd, 5th internal checks. Someone wrote “5” instead of “6”, forgot one “0” and so on. An income tax audit is intended to identify such situations. Regardless of what caused the error, a company that filed the declaration with the error will be fined.
- The income statement was not submitted within the time given for this. From the point of view of the tax service, this is a potentially suspicious activity. Perhaps a company is trying to hide something. During IRS tax audit they will check all available information and try to find out whether there are any errors or discrepancies and, of course, will require your report that is mandatory.
- Submitted information about large charitable donations. Charity is good, but unfortunately, people often hide their illegal activities behind good intentions. The large charitable contributions reported in the tax audit return may seem suspicious to a tax office. And of course, they initiate a check. If you have indeed donated to charity and you have documented evidence of this, there is no reason to worry.
- Too big losses or business expenses. If you regularly file losses data with the tax office, this can be disquieting. After all, in this case, your business will be at risk, and if you continue to do business with losses, it looks strange. In such cases, an Income tax audit is appointed to see all the details on the movement of funds in the accounts. Likewise, high business costs are alarming.
- Nice and rounded numbers. For example, if you received income in the amount of 100,325 rubles, you should not round it up to 100,000 rubles. Or you have spent 5002 rubles for the purchase of equipment, and indicated 5,000 rubles in your declaration. Although it may seem insignificant to you, from the point of view of the tax service it is a mistake and you will be charged a fine for this error revealed by the results of the tax return audit.
IRS audit preparation
In order for everything to go smoothly and your business has no problems with the tax service, you should prepare and put your documents in order as soon as possible.
Valen Group lawyers are experienced professionals who are well informed with the specifics of Russian legislation. They will help you get ready and go through the procedure quickly and smoothly. Save money and keep your composure, contact the professionals.
Related: Due diligence
Get help starting your business.
The procedure for setting up a business in Russia has been actively simplified by the government.
Today the process usually takes just three days and is not significantly different for a foreigner compared to a Russian citizen.
Founding a Limited Liability Company (LLC) is considered the most convenient form of business activity.
You need to fill the application form. Foreign nationals need to provide a notarized passport translation.
The validity of your signature on the application form should be notarized, after that it should be submitted to the relevant tax body.
You will require a legal address, a charter, and a minimum starting capital of 10,000 rubles (120 EURO).
You should also specify a general director of the LLC (this might be a foreign national with work permit) and be ready to regularly prepare and submit monthly accounting reports. Then it is possible to set up a bank account for the company.
There are many advantages of this type of business:
- easier to borrow large amounts from banks;
- easier to work with contractors;
- private investors can enter the business;
- LLC can be subject to 6 (six) percent tax.
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Related: Open a llc company in Russia