The best way to handle a tax audit is to do everything you can to avoid being audited in the first place. However, people make mistakes and the tax authorities choose random people to audit, so there is a fair chance your business will be audited at some point. Furthermore, many audits are simple affairs, so while they need to be taken seriously, you don’t need to panic if you are informed of an upcoming audit. Let’s discuss how to handle this issue.
Review the Audit Letter
Before you do anything else, review the audit letter carefully. Understand what the tax authorities want from you. For example, a correspondence audit is a request for verification of information, an error correction, or additional documentation. An office audit requires you to visit an IRS office and bring specific documents. A field audit results in the IRS coming to your business. These audits are more comprehensive, and they can request almost any documents and records from you regarding previous years’ tax returns. The IRS can audit returns within three years of filings and collect taxes for up to ten years.
If you are uncertain what the letter means, hire an attorney or accountant to help you understand the issues the authorities are bringing up. However, you should never ignore the letter or procrastinate in responding to it.
Get Your Records in Order
Get your records in order. This includes the records the IRS is requesting, but you should organize other records by year and type so that you aren’t hit by penalties for poor record-keeping.
Make certain that all relevant records are available if you have to go to the IRS office or if they come to your office. This is one reason why you must inform your accountant or attorney if the request is for anything more than a simple record verification. Your accountant or attorney can help you request the relevant information from vendors, banks and credit cards. Make every effort to reconstruct lost or destroyed records, and document your efforts. However, you cannot just make things up.
Once you have these records in order, provide an appropriate response crafted by your accountant or attorney.
Know Your Rights
When you meet with the auditor, you’ll be asked a lot of questions. Respond truthfully to the questions that are asked. On the other hand, you should not volunteer any additional information.
It’s also essential that you know your rights in this situation. For example, you have the right to legal representation during an audit, be it from your accountant or attorney. According to levytaxhelp.com you should always have a tax attorney with you during the audit. The tax attorney will ensure that you’re treated fairly by the IRS and can deal directly with the agency for you so that you can continue working. They have experience defending your position regarding your tax return, whether you took a personal deduction that wasn’t allowed or is accused of under-reporting income.
Furthermore, the IRS agent’s determination isn’t final. You have the right to appeal their decision. You have 30 days to request an appeal with the IRS Office of Appeals. After the 30 day mark, the IRS sends a Statutory Notice of Deficiency, closing the audit. When this happens, you can appeal to the U.S. Tax Court. Note that the same rules apply if the IRS has mailed a letter demanding additional documentation. This is why you cannot ignore these letters from the IRS.
Audits do not have to be terrifying ordeals. They may be a simple matter, and you can take steps to minimize the inconvenience and odds of a future one.