5 Steps That Small Business Owners Should Take When Being Targeted for a Tax Audit
Being audited by the IRS will strike fear into the heart of anyone, especially as a small business owner. However, the chance of an audit is less likely that you would think. That being said, if you do happen to fall victim to an audit there are some steps you can take to help things go smoothly.
First of all, don’t panic. It’s not as bad as you think. Thousands of small businesses are audited by the IRS each year and survive. Just take heed and follow these simple steps to make the process less stressful.
1. Determine The Type Of Audit
There are several types of audits and not all are as worrisome as you would think. First, determine which type of audit applies to you, and then go from there:
Office Audit: This type of audit is conducted in an official office of the Internal Revenue Service and can be a bit stressful, but usually it will only be focused on those issues which are specifically outlined in the letter you initially received from the IRS. For example, the IRS may question your travel expenses. In this instance, you would need to account for any and all travel expenses by showing receipts and any additional required documents. Make sure to detail the intent and outcome of each business trip.
Correspondence Audit: This type of audit usually takes place via correspondence and usually questions a specific item on a tax return. For example, it may pertain to a particular expenditure you made for your business such as office equipment. You can resolve the matter quite simply by supplying a photocopy of the credit card statement or the receipt as proof of purchase. Make sure that the date and amount are clearly visible on the documentation. You may have to pay the difference, if any. Correspondence audits are the most common, and are usually easily resolved.
Field Audit: Field audits are the most trying as they are normally conducted at your place of business or in your home. The IRS wants to investigate a special deduction, but also wants to get an idea as to how your business operates. This type of audit can be very stressful, but if you have tax representation and the proper documentation, it can be managed with little to no stress on your end.
2. Know Your Rights
Do not panic and never allow yourself to be intimidated by the IRS. It is their job to appear threatening. However, you have rights as a taxpayer. Do not let them take advantage of you, harass you or bully you into compliance or submission. In fact, you can refuse to speak to them without a tax representative present. Know your rights before attempting to deal with the IRS on your own.
3. Gather The Necessary Data
One of the best ways to beat an audit is to have all the pertinent documentation that is critical to your particular case. This includes any mileage logs and gas receipts, travel receipts, bank statements and any other necessary paperwork that has been requested by the IRS agent or that you feel may be beneficial to your audit. Only share information that is related to the year and matter in question. For example, if the audit specifically addresses a travel expense, you do not need to provide receipts for office materials. Consult your tax representative regarding any required paperwork before the audit and make every effort to obtain any and all required documentation to be presented at the time of the audit.
4. Seek Professional Representation
If you are subject to a correspondence audit, you may be able to handle the situation without the help of a tax professional if you have the necessary documentation. However, if you are the target of a field or office audit, you should seek out a licensed tax relief professional. Representation by an experienced tax attorney, Enrolled Agent, or CPA is one of your rights as a taxpayer. You want to ensure that your rights are being protected. Also, professional representation can relieve you of the burden of having to be present for every meeting with the IRS. This way your business and personal life will not suffer and you can rest assured that your case is being handled by a trained professional who is familiar with all the recent tax laws and IRS procedures.
You should work closely with your tax relief professional throughout the audit process to adequately prepare yourself for any questions that may be asked by the IRS agent. Always remember to answer with only the necessary information, do not volunteer additional details.
5. File An Appeal If Needed
If you feel the conclusion the IRS has reached is correct, then you should pay the amount owed as soon as possible. Work out a payment arrangement or offer-in-compromise (OIC) if necessary. This way you can put the audit behind you and focus on other matters. However, if you are unsatisfied with the result, you can take the matter to the IRS Appeals Office. This can give you a chance to gather more data, if necessary, and appeal your case to a higher authority. If you are still not happy after the appeals process, and you feel you have been treated unfairly, you may then take the matter to Tax Court.
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