As any small business owner knows, operating your own company comes with its own share of unique problems. From trying to stay profitable and not folding within the first year, to keeping tabs on your employees and their activities while on the clock, there are a vast number of issues you can encounter on a day-to-day basis. However, if there is one thing that anyone can agree on — regardless of if they own their own business, or if they work a standard 9-to-5 job — is that the word “audit” can strike fear into even the most stoic person’s heart.
While the intention of an audit isn’t necessarily designed to terrorize you, it doesn’t change the fact that it can arguably be one of the most alarming things that could happen to you. Indeed, it doesn’t automatically mean that the IRS suspects that you’re guilty of fraud, much less that they will find any evidence of it. Rather, it simply means that the government wants to take a closer look at your reported income, and most audits are random. To avoid any complications during this tedious process, here are three important steps you need to take.
Be Fully Prepared
When you receive your certified letter from the IRS, letting you know you have been selected for an audit, your first thought may be to start gathering up all of your relevant tax documents, credit card statements, and receipts. While this is definitely an important step, it is just one of many that you’ll need to perform during the audit preparation process. Oftentimes, the IRS will let you know precisely which documents they require from you, reducing the guesswork from knowing which ones you’ll need. However, before you start to collate them, there are a few other things you must do first.
First and foremost, make sure you are fully aware of the scope of the audit. This may entail doing some research or, if you don’t feel comfortable doing it by yourself, you may need to enlist the help of an attorney or a certified public accountant (CPA). While local CPA firm marketing may not automatically connect one to you, finding one who can help shouldn’t be an issue. There’s nothing wrong with asking for professional help, and while you may think you can handle it by yourself, one wrong move could quickly spell out financial disaster for you.
Stay On Guard (But Be Honest)
While many audits are mail-in, you may be selected for a field audit. If so, it’s important to remember that no matter how genial the tax auditor may be, the IRS is absolutely not your friend. That means that not only should you fully acquaint yourself with any questions that they may ask you, but you should never volunteer information to them, either. Carefully review the questions they have for you so you can answer them without hesitation, and do not offer them a single word more. This doesn’t mean that you should be aggressive or augmentative with the agent, though. Rather, keep the chit-chat to a minimum, and focus on the task at hand.
Regardless of the type of audit you are facing, you should always be truthful with the auditor. You should have copies of all pertinent documents on hand, and be prepared to present them to the auditing agent. Never relinquish original documents to them, as it is far too easy to inadvertently misplace something. If the agent asks you any questions about your work history, your family, or any bank deposits that may have occurred, be forthright about the information. If you have prepared in advance, you should be able to answer them with ease. Again, it is imperative to not give any extra information, especially if they did not ask for it.
Advocate For Yourself
If you have been truthful about your earnings, and you responded to the audit promptly (and were candid throughout the process), there’s a very high likelihood that the audit will be completed without issue. However, there’s also a chance that you may find that you disagree with their results. If so, then you need to take action by appealing their conclusion and formally disputing it. Within the next thirty days, be sure to appeal their results to the IRS Office of Appeals. The IRS will then send you a Statutory Notice of Deficiency, closing your audit and authorizing you to petition with the U.S. Tax Court.
In addition, you should anticipate the risk of a future audit. While the overall chances of getting audited are typically less than 0.6%, and people on both extremes of the income bracket are more likely to be selected for one, the IRS can (and will) perform repeat audits on a person. To minimize stress for yourself in the future, and to help ensure that your taxes are filed properly each April, it would be prudent to keep an accountant on hand. Their prices tend to be fairly affordable, generally running less than $500, but what they can save you in anxiety and legal hot water could make it more than worth it.
No doubt, being targeted for an audit can be one of the most harrowing experiences you could face during your professional career. Even if you believe you are handling your taxes correctly, it doesn’t change the fact that Uncle Sam is watching you and your business closely. However, by remaining smart about the entire process, and taking measures to help prevent one from happening again, you can successfully navigate the perilous waters of the routine tax audit. And in doing so, you can help ensure that your own small business remains solvent and you, in turn, remain successful.