Nowadays, there is nothing as scary as a convincing IRS that you reported all of your income and were entitled to all deductions, credits and tax exemptions. Tax audit is generally time consuming, stressful and potentially expensive, particularly for small business owners like restaurants where mistakes are very common. They are usually triggered by the difference between the tax money that should be paid and the amount paid, also known as tax gap. Filing errors such as underpayment of taxes, failure to file altogether and underreporting of income are also some of the things that can warrant a letter from IRS.
Fortunately, tax audit doesn’t have to be a painful, endless and invasive process because you can even emerge without owing more money. Additionally, the following are some smart tips for how to survive a tax audit that will certainly help you.
1. Prepare for the audit (get tax-related documents)
Preparation is one of the best survival tactics, especially for businesses with complex documentations. The rule of the thumb is to collect any relevant paperwork, such as bank statement, 1099 forms, W-2 forms, loan records, cancelled checks etc. In most cases, tax-related documents that are three years’ worth from the date a return was filed are some of the paperwork that you should keep in order, so the auditor can quickly and efficiently find the required information.
However, if you cannot find the documentation you need in your files, then you can ask for more time to reconstruct them. Early preparation enables you to get the proof of what IRS is asking if you want to stand a good chance of any unsupported claim on your return being overruled.
2. Get help from a tax professional
It is highly recommended that you hire outside help, especially for correspondence audits with up-front requests given that you’re entitled to have representation with you. For instance, if the subject of tax fraud arises during the audit, do not try to handle it yourself, but instead consult a tax professional for advice on how to respond. You can also ask to speak to the auditor’s manager in case of any unfair treatment.
3. Provide exactly what the auditor asks for
You should try as much as possible to resist the urge to volunteer information that you don’t have to offer by providing not less than what the auditor asks for. This is actually the best way to get an IRS tax audit over with quickly, answer the questions asked in a straightforward manner, but don’t come up with unnecessary excuses. Volunteering to offer additional information might raise issues that might contradict your current stand.
Liaise with the auditor about the disallowances he/she is considering, and defend your position. Nevertheless, you shouldn’t try to negotiate the amount of taxes to be paid but instead, negotiate the tax audit issues. Bear in mind that it is the auditor’s concern to prove that there was no clear intent on your part to dupe the government.
5. Appeal the result
Call the auditor if you don’t understand or agree with the tax audit report. However, if you cannot reach a compromise with him/her or rather if you cannot live with the audit result, then you can go to the Tax court or appeal within the IRS.
Jason is a passionate business blogger about finance and works as an auditor specialised in SMSF audit.