Many business owners have had to face an IRS audit, and most were terrified at the mere possibility. However, an understanding of the process and some preparation tips can help alleviate some of the fear.
Before the Audit
At first contact, the IRS Agent will provide a list of the items that they would like for you to submit. After this "Information Document Request" is provided, you will be given an opportunity to gather the documentation. The letter from the IRS will also state how the information should be submitted. Most business audits will take place in a local IRS office or at the main place of business of the taxpayer.
If a taxpayer is more comfortable having an accountant or other professional represent them or attend the appointment with them, this is allowable. The IRS Agent can compel you to appear and speak to them directly, but they cannot deny you representation. A representative may be involved from the beginning of the process, but it is also important to know that, if in the middle of the audit, a taxpayer requests time to consult a professional, the Agent must stop the audit until representation can be retained. This is explained in IRS Publication 1 "Your Rights as a Taxpayer".
It is very important to do some planning before the audit. Here are a few tips to help you prepare:
- Be organized: use the "Information Document Request" as a check sheet to make sure that all the necessary documents are available . Some of the items that are normally requested would include bank statements, tax returns from the prior and subsequent years, the business' books or ledgers, and receipts or canceled checks for the specific items that the Agent wishes to justify.
- It can be quite helpful if the receipts or canceled checks are grouped and totaled for each item being questioned. If they are organized in a neat and logical manner, the IRS agent will not have to work as hard to verify the specific items and may look upon your situation more favorably.
- If the tax return was self-prepared, it is a good idea to take a copy of any research that you used to prepare it. If the IRS asks why a certain deduction was taken, you should be able to show where the information was obtained. If an error was made, additional taxes and interest may be due, but if you can show them that it was an honest mistake, IRS agents are sometimes allowed leeway with regard to certain penalties.
- It is best not to take unnecessary documents to the audit appointment, as they will not assist the Agent in completing the audit. If the Agent needs additional documents that were not originally requested, they will provide you an opportunity to retrieve and provide that information.
During the Audit
Sometimes an audit can be completed in a few hours, but it also may take more than one appointment. The amount of time required is directly related to the number of items that the IRS is questioning and the size of the business being audited. However, it is also impacted by how well you prepare before the audit and how you conduct yourself during the audit.
Tips for surviving the audit:
- If an honest error is found while preparing for the audit, it should be presented to the agent upfront. Do not try to hide it or circumvent the truth.
- Questions should be answered fully and succinctly, with clarification provided when requested.
- An effort should be made to be polite and courteous, but flattery is generally frowned upon.
After the Audit
After the audit is concluded, the Agent will explain the adjustments that are being proposed. At this point, the taxpayer has the option of agreeing or disagreeing with the adjustments. If you agree with the adjustments and additional tax is due, payment will be requested. However, if you do not have the cash flow to pay immediately, you may request an installment agreement, to be payable over several months. It should be noted that interest and penalties will continue to accrue while there is an unpaid balance on the installment agreement.
If the adjustments cannot be agreed upon, you have the option to request a conference with the Agent's manager. If a resolution still cannot be reached, you may then request a conference with the Appeals Division. If the issue is still unresolved, the taxpayer has the option to appear in tax court and have a judge resolve the situation. So, the IRS Agent who conducts the audit is not the final judge of any case. If they are unreasonable or totally uncooperative, the taxpayer has other avenues that can be pursued.
An IRS audit does not have to be a scary event. A taxpayer need only remain calm, understand the audit process, know their rights, and be prepared.