There are certainly horror stories in which IRS audits have led to the closure of businesses. Yet these are really worst-case scenarios. The fact is that audits are fairly routine for businesses and can be resolved quickly.
Hey, even if you are diligent with your taxes, you may still get the dreaded audit letter from the IRS. After all, the agency uses computer systems to detect potential issues, such as unreported income or questionable deductions.
#1 – Understand The Types Of Audits
There are three:
Correspondence Audit. This is often the easiest to handle. As the name implies, much of the process is done via the mail or phone calls. Oh, and a correspondence audit typically involves one or two specific tax issues.
If you believe there is an error, then you can write a letter that provides a concise explanation of your position. You should also provide support, like a receipt or cancelled check.
Office Audit. This will be limited to a particular part of your return. However, the IRS will be more intensive and the in-person meeting – which is usually at a local IRS office — can last an hour to four hours.
While you can request that the meeting be at your home or business, this is usually a bad idea. The reason is that the IRS may be alerted to other potential tax problems, especially if you have an expensive home or cars. Let’s face it, an auditor may start to wonder if you are properly reporting your income.
Field Audit. Unfortunately, this one is likely to be very serious and you really need to get the help of a tax professional. A field audit will be at your home or business – and the IRS will usually have an experienced auditor on the case. He or she will also have strong investigative powers, such as to issue a summons (this is a legal order to compel disclosure).
#2 – Getting Organized
This is the key to an audit. Consider that the IRS presumes you are guilty until proven innocent! So yes, you need to marshal evidence for your position.
Yet what if you haven’t been so attentive to the details? Well, there is hope. You can reconstruct transactions, such as by reaching out to the financial institutions you use and also to any digital platforms like Venmo, PayPal, Square and so on. It’s also a good idea to contact vendors to get receipts or invoices.
Something else: After you have collected the necessary information, you need to present it in a way that is clear and convincing (also make sure you keep all the originals since things can get lost in the IRS bureaucracy). It’s definitely a bad idea to just dump a box of receipts on an auditor’s desk.
#3 – The Audit
No doubt, an audit meeting can be stressful and scary.
But there are some strategies to keep in mind. Actually, one is about scheduling. If possible, setup a meeting for late in the day on a Friday. This may put more pressure on the auditor to get the case closed …before the weekend!
You also need to strike a balance of being respectful but forceful. As much as possible, stick to your evidence and fight for your positions.
What’s more, do not say anything that is false. Keep in mind that an auditor has access to a lot of information and he or she may be testing you. So if you are caught in a lie, your audit could be tough.
Finally, do not rush to say anything. The focus should be on the issues of the audit – and nothing more. If you get too chatty, you may accidentally volunteer information that could harm your case.
If an audit concerns a minor problem, then you may be able to handle everything on your own. But then again, if you have a field audit or one that is at an IRS office, it’s recommended to get a qualified tax advisor, such as a tax attorney, CPA or Enrolled Agent. Such a person will be able to prepare your case, navigate the IRS bureaucracy and help negotiate a beneficial outcome. In fact, a tax professional may even be able to find overlooked tax deductions, which could ultimately lessen the financial impact of an audit.