Why is the IRS auditing my business associate and me?

The IRS might choose to review your tax return in detail, particularly if you have dealings on record with individuals under audit. In fact, the IRS could decide to audit anyone at any time. There are only a few limitations on this power, although internal practices tend to limit tax reviews to returns filed over the past three years. The bottom line is that many Pennsylvania individuals and companies are audited every year — it is not an accusation of wrongdoing.

While the IRS does perform audits without evidence of error, it is often advisable to exercise caution after receiving any notice of review. It is also usually a good idea to prepare fully if you discover that a business associate is undergoing a concurrent audit. 

The IRS website refers to this type of cascading tax return review as a related examination. During the audit process, the Service typically collects information about business partners, investors and other related parties from an initial subject. Agents then go on to investigate the tax information of those parties. If you were involved financially with the taxpayer in the primary investigation, then you could be the next subject of the extended audit process. 

The good news is that your audit could be little more than a perfunctory investigation. Agents carry out many of these types of reviews from their offices; yours could finish with no invasive visits to your home or workplace. However, you should probably still prepare to comply with the IRS by reviewing the returns in question and collecting relevant tax information. Each case should be taken individually — this is not specific legal advice. It is meant only to inform.

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