You get the letter you’ve always dreaded – a letter from the Internal Revenue Service or local tax authority saying your business is being audited. Now what?
Understand Your First Communication
All IRS audits are not the same. A correspondence audit is a written letter usually questioning some items on your business return, not your entire return. Copies of a few receipts or bank statements might satisfy the audit.
A field audit begins as nothing more than a face-to-face meeting with an IRS representative to discuss certain discrepancies, but can lead to a review of your entire return – documentation not immediately required. You have the right to choose where to hold this face-to-face meeting; a neutral site like the office of your accountant or tax attorney may be a good choice. You also have the right to schedule the appointment when it works best for you. Some tax experts recommend requesting a delay to give you and your financial professionals time to gather the necessary documents.
A criminal investigation, on the other hand, is as serious as it sounds. But according to the legal website nolo.com, the unofficial minimum amount of taxes owed before the IRS will file criminal fraud charges is over $70,000. Nevertheless, contact an experienced tax attorney if you become the subject of this latter audit.
How to Deal With the Tax Auditing Process
Don’t panic if the IRS notifies you about a tax audit. If you don’t feel comfortable dealing with the audit alone, consider hiring a tax attorney, accountant or enrolled agent.
Either through your professional tax advisor or if you’re dealing with the audit yourself, respond promptly to all requests. Be polite and business-like. If the IRS asks for specific information, give copies of proof for the items in question – and nothing more. If you don’t have backup for items in question, the IRS will estimate for you. Additionally, realize that you could incur a fine for shoddy recordkeeping.
The IRS publishes a list of your rights in Publication 1, the Taxpayer Bill of Rights. You can find a list of your rights here as a taxpayer in this PDF. Among these is the right to:
- Challenge the IRS’ position and be heard
- Appeal before an independent forum
- Retain representation
If you record your company’s income and expenses appropriately and are above board with your tax returns, your tax audit experience needn’t be painful.