Being prepared is the best bet for getting through a tax audit with confidence.
How can you prepare for a tax audit? There are several things to consider.
Getting a tax audit can be stressful and even just getting a letter from the IRS could instill anxiety if you are not confident in your records or return. It is important to first find out if the IRS is actually looking for a field visit, or if perhaps it is less serious. For example they may just need to have a copy of a document submitted, or schedule a meeting for you to come in and discuss a document. However being ready in the case of an audit is well worth the effort.
Well-presented is half sold…
It’s important to form good organizational habits that set your business up for having information recorded regularly. This information should be organized in a way that it can be easily accessed. This comes in handy especially under pressure when you need to find a figure fast. If you try to gather all of your information at the last second you could lead the auditor to believe that you have neglected to keep good records and could cause you to be penalized. Be aware of what kinds of documents the IRS may need to see in advance, so that as you go through the year these kinds of documents can be filed neatly and this way if you are audited, whether or not you have made any errors, you can come across professional and organized.
IRS employees will be more lenient on missing information or mistakes if it looks like it was truly an accident and not the result of poor organization. For example, if there was a natural disaster that destroyed a year’s worth of records, it would be favorable to have the documentation of any efforts you have made to recover said data.
Click here for a list of documents the IRS may like to see.
Attitude and Demeanor
As important as it is to have the office organized and data easily accessible, it is also important to be calm and cooperative, although this does not mean volunteering information that no one asked for. It is easy to say something that would have been overlooked but once you say it, it becomes something the auditor may feel necessary to inspect further, and the IRS agent is not there to be your friend. The agent has an agenda to find mistakes especially if they are the kind that mean your business owes more taxes, so when it comes to talking, less is more. In fact, if you are being audited it is often recommended to not even call the IRS yourself or to be the person present during the actual audit. It is highly recommended that you hire a tax professional (Like Ruth Collins, C.P.A.) as tax code is very complicated and the years of training that tax professionals endure makes them much more prepared to handle the audit competently and with your best interest in mind.
Wondering what may trigger the IRS to Audit your business?
There are many reasons that a business may get audited, such as deductions that seem unlikely based on the income claimed, excessive meals and entertainment expenses or unusually high usage of a company vehicle. Computer scoring systems called Discriminant Information Function, or DIF are run on taxpayer data looking for things that are out of the normal patterns. More on red flags here…
No business keeps perfect records, but the closer you can be to having all of your data under control the better. Just remember to always be respectful and cooperative of government employees, and work all year to diligently keep your records organized and in the event of a tax audit you will have confidence because you took the time to prepare the best that you could.