Okay, so you are the subject of an audit. You’ve got this.
A fair number of business owners will receive the dreaded IRS Audit Notice in the mail this year. Last week I gave you a few simple tips to help avoid being audited at all. This week I am sharing some strategies to help ease the pain if you are.
What kind of audit has been requested?
There are three types of audits. A correspondence audit, a face-to-face audit at an IRS field office, and a field audit at your place of business.
The 2016 IRS Data Book, reports that 71% of audits conducted were conducted through the mail. Correspondence audits are typically resolved by providing the IRS additional documentation to support your return.
Audits conducted at an IRS field office require a more detailed explanation than can be provided through the mail. You will be asked to bring documentation specific to the concern that triggered the audit.
Audits conducted at your place of business are most in-depth. They are required when your return is perceived as having several issues.
How to prepare
Start with the question “Why am I being audited?” Most audits target a portion of a return, not the entire thing. Be sure to provide only the information the IRS asks for. You do not want to inadvertently broaden the scope of the inquiry.
Get organized beforehand and come prepared with all your records and documentation. This is where accurate recordkeeping comes into play because the IRS has up to three years to review your return. Technology has made it easier to keep records. For instance, you can attach receipts to expenses in your bookkeeping software using the software itself or a third-party program.
Be prompt and friendly. Newsflash: The taxman doesn’t like to be ignored! Respond to the notice immediately. Don’t be antagonistic as this can leave the agent feeling like you have something to hide. In this case, your grandmother is right – “You catch more flies with honey.”
Bring back-up, even if it is just a correspondence audit. You are entitled to bring representation. Talk to your accountant to be sure you are mailing everything the IRS needs specific to the scope of the examination. If you are too nervous or irritated to courteous during a face-to-face interview, bring someone to do the talking for you. Lawyers, CPA’s, and Enrolled Agents are all legally allowed to represent you in front of the IRS.
Many audits are resolved simply by proving the requested documentation and no further action is necessary. More likely, the IRS will request changes to your return, which you can accept or appeal. Believe it or not, those changes can work in your favor. The 2016 IRS Data Book revealed that 37,000 audits resulted in the taxpayer receiving a refund.
The Bottom Line
It is natural to be apprehensive when faced with an audit. However, the truth is most are not a big deal. The majority are generally the result of a mathematical error or other honest mistake. Prepare your return honestly and maintain your records and you will have no problem. You’ve got this!