IRS Compliance Check for Small Businesses: Pre-Visit Checklist

Quick overview

An IRS compliance check is a targeted review—less formal than a full audit in many cases—where IRS examiners verify records and tax positions for a particular year or issue. The IRS uses compliance checks to ensure accurate reporting and proper payment of employment and business taxes (IRS, “Tax Compliance Checks”). Preparing a clear, organized response before an agent arrives shortens the process and lowers the chance of unnecessary adjustments.

Why preparation matters (practical context)

In my 15+ years advising small businesses, preparation separates firms that resolve issues quickly from those that face extended examinations and penalties. A deliberate pre-visit packet that explains your accounting choices, reconciles totals, and provides supporting documents creates credibility with examiners and reduces follow-up requests.

Sources: IRS — Small Businesses & Self-Employed; IRS — Tax Compliance Checks (irs.gov)

Pre-visit checklist: Documents and records to gather

Collect electronic and paper copies where possible. Label everything and include a quick index.

Core tax and filing documents

• Federal tax returns for the years listed in the notice, including all Schedules (e.g., Form 1120, 1120-S, 1065, or Schedule C as applicable).
• Payroll filings and deposits (Form 941/944, Form 940 where relevant) and W-2s/1099s.
• State tax returns and state unemployment filings if requested.

Accounting and bank records

• General ledger, chart of accounts, and trial balance for the tax years under review.
• Bank statements, bank reconciliations, and canceled checks.
• Credit card statements and merchant account reports.
• Cash receipts journal, point-of-sale reports, and daily sales summaries.

Supporting source documents

• Customer invoices, sales receipts, and contracts.
• Vendor invoices, purchase orders, and proof of payment (cancelled checks, ACH confirmations).
• Receipts for deductible expenses, travel logs, and meal documentation showing business purpose and attendees.
• Inventory records and year-end counts, if applicable.
• Fixed asset schedule and depreciation backup (purchase invoices, placed-in-service dates).

Payroll & employee records

• Employee payroll registers and detailed wage worksheets.
• Timecards, third-party payroll reports, and benefits documentation.
• Independent contractor files and Form 1099-NEC copies.

Loan and ownership documents

• Loan agreements, promissory notes, and statements showing principal and interest payments.
• Shareholder/partner agreements, buy-sell agreements, and documents for ownership changes.

Miscellaneous

• Accounting policies memo (how you recognize revenue, capitalization thresholds, method of accounting).
• Prior correspondence with the IRS and previous audit workpapers.

Build a concise “audit packet” (recommended structure)

Create a binder or a single electronic folder with a cover letter and a one-page summary explaining the business, accounting methods, and any unusual events (owner contributions, major asset sales, one-time income spikes).

Suggested packet tabs:

1. Cover letter and summary of requested years
2. Organizational documents and ownership changes
3. Tax returns and schedules
4. General ledger & trial balance
5. Bank statements & reconciliations
6. Payroll records
7. Invoices, receipts, contracts
8. Fixed assets & depreciation
9. Prior IRS correspondence
10. Contact list and representation power of attorney (if any)

Label files with clear file names and include a table of contents page for quick navigation.

How to organize records so examiners can find what they need

• Reconcile totals up front: show how your ending balance on the general ledger ties to the tax return line items.
• Provide a short narrative for unusual items (e.g., ‘‘2023 one-time sale of equipment; proceeds recorded on line X’’).
• Use bookmarks in PDFs and a digital index for scanned documents.
• Highlight key pages (e.g., the bank reconciliation that proves deposits match reported revenue).

Common issues examiners check and how to preempt them

• Underreported cash receipts: provide POS reports, daily sales logs, and bank deposits.
• Payroll misclassification: have documentation demonstrating independent contractor status or W-2 status.
• Personal vs. business expenses: maintain clear expense policies, mileage logs and allocate home office properly.
• Missing 1099/1098 forms: compile a summary of all forms issued and received.

Practical tip: run a simple variance report comparing bank-deposited revenue vs. reported gross receipts; be ready to explain material gaps.

Communications, deadlines, and representation

• Read the notice carefully for deadlines and the type of check (field visit vs. correspondence). Many correspondence requests show a response date—adhere to it. If you need more time, request an extension in writing and explain why.
• Consider having a CPA, EA, or tax attorney represent you. If you appoint someone to speak for the business, complete IRS Form 2848 (Power of Attorney) in advance. (IRS, “Small Businesses & Self-Employed”)
• Keep all communications professional and document them (date, time, who you spoke with).

Handling the on-site visit

• Designate a knowledgeable employee to escort the examiner and answer logistical questions.
• Provide the pre-prepared packet and be available to pull additional documents if requested.
• Don’t volunteer extra information; answer questions succinctly and refer to documents.
• If the examiner requests original records, ask for a receipt or offer certified copies; avoid handing over unique originals when possible.

Typical outcomes and next steps

• No change: the IRS closes the check with no adjustments.
• Agreed adjustments: you accept proposed changes, and the IRS issues a report and any balance due or refund.
• Proposed adjustments with appeal rights: you can request an Appeals conference if you disagree (IRS Office of Appeals).

If adjustments increase tax owed, the IRS will send a report with how to pay or dispute the findings. You have rights under the Taxpayer Bill of Rights; review them at the IRS website.

Record retention guidance

Keep records at least three years from the date you filed the return, but retain payroll records and business property backup for up to seven years in many cases. For suspected fraud or if you haven’t filed, keep records indefinitely. Consult IRS guidance on recordkeeping for specifics (IRS, “Recordkeeping for Small Businesses”).

Mistakes to avoid

• Waiting until you receive the notice to start assembling records.
• Handing over disorganized files that don’t connect to the return.
• Not consulting a tax professional when complex transactions or employment tax issues arise.

Useful templates and internal guides

• Use a one-page cover letter that summarizes the tax years, key figures, and who to contact. This reduces repeated questions.
• Prepare an index that maps each requested item to a specific tab and filename.

For more tactical guidance, see our related pieces: “Preparing a Concise Audit Response Packet: Checklist of Documents” (https://finhelp.io/glossary/preparing-a-concise-audit-response-packet-checklist-of-documents/) and “Small Business Recordkeeping Best Practices to Avoid Audits” (https://finhelp.io/glossary/small-business-recordkeeping-best-practices-to-avoid-audits/). These articles include templates and sample file structures.

Final professional tips (from practice)

• Start an ‘‘audit-ready’’ folder now and update it monthly. Small ongoing upkeep prevents last-minute scrambles.
• Run at least one internal reconciliation between books and bank deposits each quarter—this catches issues early.
• If you anticipate a complex inquiry (e.g., large related-party transactions), engage a CPA before the visit to produce an explanatory memo.

Disclaimer

This article is educational and general in nature and does not replace personalized tax or legal advice. For specific guidance tailored to your facts and circumstances, consult a licensed CPA, enrolled agent, or tax attorney.

Authoritative sources

• IRS, “Small Businesses & Self-Employed” — https://www.irs.gov/businesses/small-businesses-self-employed
• IRS, “Tax Compliance Checks” — https://www.irs.gov/businesses/small-businesses-self-employed/tax-compliance-checks
• IRS, “Recordkeeping for Small Businesses” — https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping

Related FinHelp articles:

• Field Audit Survival Guide: Interviews, Records, and Strategy — https://finhelp.io/glossary/field-audit-survival-guide-interviews-records-and-strategy/
• Preparing a Concise Audit Response Packet: Checklist of Documents — https://finhelp.io/glossary/preparing-a-concise-audit-response-packet-checklist-of-documents/