Surviving a Business Tax Audit

Written by Briana Cavanaugh

April 9, 2010

I’ve watched all manner of people and clients freak out about audits. This seems to get especially bad around tax time. One of my colleagues writes a great newsletter and I thought I’d share some of her wisdom to help get you get back to business.

From: The CPA Newsletter:
Surviving a Business Tax Audit

A tax audit might be the ultimate nightmare scenario for many business owners. Therefore, I thought it might be helpful to provide some audit survival tips for small businesses. These tips apply whether your business is being conducted in a business entity or as a sole proprietorship.

1. Remember what an audit is all about – An audit means the IRS needs to reconcile what they think you owe to what you’ve paid. It doesn’t mean you are being accused of something or that you have done anything wrong. Many audits end with the happy letter stating that no change is necessary to your tax payment. It’s even possible that an audit can result in a refund. Therefore, don’t assume you’ve done anything wrong.

2. Provide only what is asked for – Prior to the commencement of the audit you, or your representative, will receive a letter requesting certain documents or other information to have available at the initial meeting. Provide specifically what is requested and nothing more. Make sure your receipts and invoices reconcile with each other and with your tax return. Reconciliation is an automatic procedure in every audit. If the records integrate with the return, it may well prevent the agent from expanding the original scope of his audit.

3. Some patience and understanding is in order – In recent years the IRS has been doing compliance audits for certain industry market segments. At times these audits can be prolonged. The companies in these industries are generally selected at random, so if your company is one of the chosen, it doesn’t mean that the IRS has concerns about your company in particular. However, if you know that you have been pushing the envelope with the numbers and deductions, you may need all the help you can get.

4. Be properly represented – It has been said that one who represents himself in court has a fool for an attorney. The same is true in dealing with the IRS. Your interests would best be served by a tax professional who understands the language, rituals, and even the games that can be played when one interacts with the IRS. For example, skilled IRS agents often ask questions that seem innocuous, but can have ramifications you’re not aware of. Casual, seemingly harmless conversation can be trap bait for the unwary.

5. Give the impression of total organization from the outset – Even if you are well represented, the agent at some point will likely want to question the business owner at his place of business. This should be done only with your representative present. In many cases, a tour of the facility would be Included in this visit. Not only is it important for you and your representative to be organized and prepared regarding the books and records,, but also from the standpoint of the appearance of the physical place of business. Good impressions can score many advantage points.


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