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Just the idea of being audited by the IRS strikes fear into the hearts of most small business owners. Some peace of mind should be found in knowing that being selected for an audit doesn’t necessarily mean you’ve done anything wrong.
If your business does receive an audit notice, however, there are steps you can take to make the process less stressful. Here are some tips from Cheryl Jefferson & Associates on how to survive an audit.
Don’t Ignore the Notice
It’s tempting to ignore anything that is scary or uncomfortable. That would be a mistake with an audit notice.
Your IRS audit notice will typically provide a deadline for responding and instructions about what information is needed. If you fail to respond, the IRS may proceed with the examination based on the information available and propose adjustments to your tax return.
When you receive a notice, make it a priority. Review the deadline, verify that the notice is legitimate, and determine what steps are required.
Follow the Directions
Read the letter you receive from the IRS carefully and ask a qualified tax professional to help interpret it if necessary. Although the IRS has taken steps to make its letters easier to understand, tax matters can still be confusing.
First, determine what sort of audit you are being subjected to. The IRS conducts audits by mail or through an in-person interview.
A correspondence audit generally involves exchanging requested documentation by mail. An in-person audit may take place at an IRS office, your business, or another designated location.
The audit notice should identify the tax year and the items being examined, along with instructions for responding.
You can learn more about the process through the IRS guide to audits.
Get Organized
It is your responsibility to support the deductions and other items being examined during an audit. The more organized your records are, the easier it will be to locate the documentation needed.
Tossing a shoebox full of jumbled receipts in the mail isn’t going to cut it. Instead, gather the relevant invoices, receipts, bank statements, payroll records, and other supporting documents requested.
If you find that some records are missing or incomplete, now is the time to determine whether they can be reconstructed. Contact vendors, financial institutions, or other sources to request duplicate records when necessary.
Without adequate documentation or other acceptable substantiation, certain deductions may be disallowed.
Maintaining organized records throughout the year can also make future audits easier. The IRS recordkeeping guidance explains why businesses should maintain documentation supporting their income and expenses.
Provide Only What Is Asked
Don’t offer more information than what is requested simply in an effort to be helpful. Providing unnecessary documents can create confusion and additional questions.
Focus on the items and periods identified in the audit notice. Make sure your responses are complete, accurate, and supported by the appropriate records.
However, don’t assume the IRS can never request additional information or records from other periods. The scope of an examination may change when legally appropriate.
Generally, send copies rather than original documents unless the IRS specifically instructs otherwise. Keep a record of everything submitted, including the date and method of delivery.
If the IRS requests additional information, review the request carefully and respond within the required time frame.
Get Help
Tax audits can become complicated affairs very quickly, and it’s important that you understand your rights.
The U.S. tax code isn’t light reading, so getting professional assistance may be helpful when you’re faced with an audit.
A qualified tax professional can help you understand the notice, organize supporting documentation, evaluate proposed adjustments, and determine whether representation is appropriate.
Taxpayers also have rights during an IRS examination, including the right to representation and the right to challenge the IRS’s position and be heard. Learn more through the IRS Taxpayer Bill of Rights.
The goal is to respond accurately, protect your rights, and resolve the examination based on the facts and applicable tax law.
At Cheryl Jefferson & Associates, we understand how important accurate accounting records and reliable financial information are to small businesses. Our Subscription Services help business owners maintain better financial visibility and stay organized throughout the year.
Contact CJA to discuss your business’s accounting and financial reporting needs.
Frequently Asked Questions
Does receiving an IRS audit notice mean my business did something wrong?
No. Being selected for an audit does not automatically mean an error was made. The IRS may select returns for examination through several methods, including computer screening and related examinations.
What records should I prepare for an IRS audit?
The records depend on the items being examined. Common examples include invoices, receipts, bank statements, payroll documentation, and other records supporting the amounts reported on your tax return.
Can I have someone represent me during an IRS audit?
Yes. Taxpayers generally have the right to representation. Attorneys, CPAs, and enrolled agents may represent taxpayers before the IRS, subject to applicable authorization and practice rules.
