The definition of an IRS audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.” Many business owners get caught off guard when they receive a notice from the IRS and scramble to figure out what to do. There’s no need to panic if you are being audited by the IRS. There are things you can do to make the audit process less painful and more stress-free.
An IRS notice is not a cause for celebration, but it’s not the time to panic, either. Rather, experts like CPA Samuel Kerch of AskCPASam.com recommend not getting upset about the notification and doing anything prematurely without fully understanding the audit process and your responsibilities. Remember that an audit is just an accounting procedure. It’s not a firing line or an indictment. It’s also a process, so when you receive a notice, it’s just the beginning of a process, not a foregone conclusion of any wrongdoing or criminality. You can find out about the process by reading IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refunds, and better understand what will happen and what you need to do.
Make a Plan
When you get notice you are being audited, start by making a plan. Read the notice carefully for any initial instructions and note any deadlines set forth as well as contact information for questions and replies. Your plan for should include getting professional help from the very beginning of the process. Don’t share your business information or documents with the IRS without experienced counsel from someone who knows tax law and regulations. After securing assistance, create a file for the tax audit and a checklist of things to do.
Work with your accountant and payroll service to prepare records and documents, correspondence, and any other actions you need to take to prepare for the audit.
Prepare Documentation and Paperwork
The IRS will examine your books and documents related to your tax return. Review the audit notice and work with your tax preparer or accountant to organize all documentation and paperwork that substantiates your return. Don’t bring a pile of receipts and disjointed paperwork to the audit meeting and expect it to go well. Messy records are an invitation to the IRS to spend more time and dig deeper into your business accounting, which is a recipe for a more painful audit.
Neatness, tidiness, and orderly organization help the auditor understand your reasons for filing and help them get through the process more quickly, which only goes in your favor. If you don’t have adequate records to substantiate your filing, talk to your professional. An IRS auditor can estimate your income and expenses, causing your taxes to be higher. They may also give you a separate penalty for failure to keep records.
What Kind of Documents are Needed?
Documenting expenses with written backup versus oral explanations usually means a more successful audit outcome. There may be a list of documents to bring to the audit in the notice. Make sure you have these documents. The types of documents needed will depend on the reason for the audit and the type of returns in question.
A tax audit is not a pleasant experience, but there are plenty of ways to handle it effectively and get through it without panic and desperation. Of course, the best thing to do is prevent the audit in the first place by working with a tax professional. If you pay employees, you may have a source of payroll tax help if you use a payroll service. A certified tax prepared or CPA can help you avoid fines, fraudulent activity, and organize everything you need in the event of an audit.