Tax time is already stressful enough without mentioning the incidence of tax audits. Both businesses and individuals are exposed to IRS tax audits, which ensure that the income and expense deductions are in compliance with tax laws.
While an IRS tax audit might be a scary prospect, it can be handled in a way that minimizes its negative impact. While you may still incur penalties and/or fines, understanding the process can help you prepare adequately.
The first step is to understand the type of IRS audit you are subjected to. In general, there are three types of audits the IRS may decide to use for you or your business:
- Audit by Correspondence: Through this type of audit, the IRS will be requesting supporting information through the mail. This is the most common and easiest type of audit and involves only one or two tax issues. Follow the instructions explicitly. Do not try to read between the lines, give them exactly (and only) what they ask for.
- Office Audit: This type of audit will require you to go to the IRS office for the audit to be performed. This is quite similar to the correspondence audit. It usually only deals with one or two items, and the IRS will provide you with a list of what they need. These audits are usually limited to a certain part of your taxes. While you may request for the meeting to take place at your business or home, it is preferable to conduct it at the IRS office.
- Field Audit: In this case, an IRS agent will be assigned to your case and will perform the audit on site at your business or location. This is a more serious type of audit, through which you will need the help of a tax professional. This is a serious deal, get help!
Here are a few steps you can follow to survive an IRS audit:
- Understand the process
It’s important to understand the audit process. Usually, it is rather simple and includes a notification from the IRS, as well as the documentation to gather and submit by the appointment date or deadline. The IRS usually reviews the submitted documentation and information and determines a final decision.
- Prepare adequately
Preparing for an audit and getting organized is crucial! Having a reliable accounting system like QuickBooks or Xero will help in preparing more adequately. It will also contribute to a smoother audit.
If you haven’t been using a good accounting system, it is possible to reconstruct your transaction history. You can do this by contacting vendors and financial institutions, using the online platforms of your banks, or gathering your receipts and invoices.
An additional tip is to make copies of your original documentation and organize your supporting information well. This will help the audit be more organized and yield more positive results.
- Get reliable professional advice
If your audit is either a field or office audit, you may want to consult a professional. A Certified Public Accountant (CPA), tax attorney, or Enrolled Agent (EA) can help you prepare your case, get organized, and negotiate a just resolution. The right tax professional can even help you minimize the negative impact of a tax audit.
In conclusion, keep in mind that IRS tax audits are common occurrences that can be managed effectively. Having the proper understanding, organization, and strategies can make the difference between a successful case and a failing one.
Contact us if you need any help with your taxes or with preparing for an audit. We’re here to help!
Sources:
- Laurence, J.D. Beth. “Checklist: How to Survive a Tax Audit.” Www.nolo.com. Accessed January 06, 2018. https://www.nolo.com/legal-encyclopedia/survive-irs-tax-audit-29478.html.
- Murray, Jean. “How to Survive an IRS Tax Audit of Your Business.” The Balance. Accessed January 06, 2018. https://www.thebalance.com/how-to-survive-an-irs-tax-audit-of-your-business-398979.
- Taulli, Tom. “4 Ways To Survive A Dreaded IRS Audit.” Forbes. August 06, 2017. Accessed January 06, 2018. https://www.forbes.com/sites/tomtaulli/2016/11/26/4-ways-to-survive-a-dreaded-irs-audit/#5dd.
Being subject to an IRS audit can be a monumental challenge for your small business. In fact, the IRS has been getting more vigilant in their approach toward such businesses in recent years. However, there are ways to avoid an audit.
As a professional service provider, applying effective tax strategies can help you meet your financial goals. While you may feel too busy with the demands of your practice, it’s crucial that you take the time to plan your tax strategy.