No business owner looks forward to a letter from the taxman requesting a closer look at the books.
If you’ve received an audit letter – an official request by IRS to review your accounts and confirm your taxes have been paid to date – don’t panic. Prepare.
These four steps will help you get through the process with minimal stress and the best possible outcome.
Don’t panic. An audit doesn’t necessarily mean you’ve done something wrong. Sometimes, audits are random or triggered by certain red flags in your tax return. Carefully read the audit notice from the IRS. It will specify the type of audit (mail, office, or field), the items under review, and the documentation you need to provide.
Respond promptly to the audit
Adhere to the deadline specified in the audit notice. If you need more time, contact the IRS as soon as possible to request an extension. Give the IRS the information they’ve requested promptly so they can close the file quickly, and you can move on.
If an on-site audit is required, you can’t avoid the inevitable. Call to confirm the date and request any information the auditor will need to help you prepare. Usually the auditor may only ask you to provide receipts and answer a few questions.
Responding promptly and cooperatively every step of the way is the best strategy for getting through an audit. Reacting defensively or unprofessionally can invite more probing questions.
Don’t do it alone
Seek professional help. Get in touch with your accountant as soon as an audit has been scheduled for advice and support. And if you’ve been handling the books on your own, now is the time to consider hiring a tax accountant or CPA.
A tax accountant can explain the audit process, help you get your books in order, and offer personalized advice to help you prepare.
You may want to hire a tax lawyer if you have concerns that are beyond an accountant’s scope – if, for instance, you have unfiled returns, under-reported income, understated tax liabilities, or if you can’t validate all of your expenses for the tax year in question.
Many CPAs offer a free consultation and can provide peace of mind by explaining your obligations and rights, and ensuring those rights are protected.
An auditor will ask you to provide receipts that prove you qualify for any write offs you’ve claimed. On the day of the audit, be ready with your paperwork and be prepared to answer any questions.
Being organized and prepared shows you’ve done your best to report your taxes accurately. If your papers are in good order, and you don’t raise any red flags, it’s much more likely the auditor will wrap up once the audit’s basic requirements are met.
As a word of caution, only provide the auditor with the information they’ve asked for – no more, no less. Offering more explanation or “proof” in the hope of avoiding further questions may backfire, raising new ones. Stick to specifics.
In the best possible scenario – your records are in order and you’ve been conscientious about paying your taxes – an audit won’t lead to any unpleasant surprises.
If, however, an auditor finds that you do owe unpaid taxes, unless you have a solid reason to challenge the auditor’s findings, pay what you owe immediately or set up a payment plan.
You’ll avoid accruing additional penalties, interest, fees and payments. Perhaps more importantly, you’ll be able to put the audit behind you so you can get back to focusing on your business.
Understand Your Rights
Familiarize yourself with your rights as a taxpayer. The IRS has a Taxpayer Bill of Rights that outlines your rights during the audit process. Knowing these rights can help you navigate the audit with confidence. If you disagree with the audit findings, you have the right to appeal. Follow the instructions provided in the audit report for initiating an appeal.
A final word to the wise: if you do try to fight the IRS, before pursuing legal action weigh the cost and benefit. Most audits are resolved with minimal or no changes to the tax return. If you’re unsure about any step in the process, seeking professional advice is always a wise decision.