NFIB

What to Expect If You Are Audited
03/ 28/ 2002

by John Shiffman

The first sign you've been audited-a letter from the IRS-isn't likely to come until more than a year after you file a return. IRS agent Ray Smith says a taxpayer who files a return in April 2001 probably wouldn't be contacted until at least June 2002. From there, the process can take another year.

During an audit, the IRS will generally look for two things: whether the filer honestly reported all income and whether the reported expenses are genuine.

The auditor is likely to pay a preliminary visit to your business and examine bank statements and office records, as well as your personal financial records. If you can't, or won't, produce them, the IRS can subpoena them from the banks.

"Good records will win half of the battles," says Frederick Daily, author of Surviving an IRS Tax Audit (Nolo Press, $24.95).

Smith of the IRS agrees: "The bottom line is that the agent is looking to see: how did you come up with the figures? So the more organized the records are, the quicker the process will be."

One relatively new wrinkle to IRS audits that all small business owners should know about: As part of its "reform" effort, the IRS has created teams of auditors who specialize in certain trades, such as entertainment, plumbing, or retail, for example. Pizza restaurants are another specialty. This is a potential good-news, bad-news situation. These trained auditors are less likely to waste a taxpayer's time trying to understand how a particular business works. But as experts, they're also more likely to quickly spot a scofflaw.

The hidden gem for the savvy small business owner is that these specialized teams, called MSSPs, or "market segment specialization programs" follow official manuals, and anyone can read them.

"A small business that's curious about what we do or what we're finding in a particular business or industry, might want to get a hold of one of those," Smith says. "They talk about the kind of issues the agents are running into."

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What are the odds?

Sole proprietorships filing under "Schedule C" status face an even higher rate of audit than other small business owners. Why? Schedule C tax returns are based largely on the honesty of the filer, and over the years, the IRS has found that Schedule C filers are least likely to accurately report income.

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Don't Make These Mistakes

According to the IRS, these are the most common errors made by tax filers:

1. Incorrect or missing social security numbers.

2. Incorrect tax entered from the tables.

3. Computation errors in figuring the child and dependent care credit or the earned income credit.

4. Withholding and estimated tax payments entered on the wrong line.

5. Math errors-both addition and subtraction.

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This article originally appeared in the March/April 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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