09/ 28/ 2007
by Tamara E. Holmes
One of the most frightening experiences any small-business owner can face is an audit by the Internal Revenue Service. Even if you've been diligent about keeping records and filing your taxes on time, you're not guaranteed to escape further scrutiny into your business finances. But the experience can be less daunting if you remain calm and follow a few suggestions to keep a bad situation from getting worse.
A number of things can trigger an audit. Your reported figures might not match up with a client's reported expenses. The amount you spent in a certain category might be higher than the amount spent by similar business owners. Or you could simply be one of the random 5,000 S Corporation business owners the IRS announced last summer that it would target to determine reporting compliance of business entities. Whatever the reason your business is targeted, the important thing is that you don't panic.
If the audit is narrow in scope, you might simply be asked to send written documentation to clarify a couple of questions about your business' finances. If so, send copies of the documentation and that might be the end of it.
However, you might be asked to come to a local IRS office or someone might come to your office to review your documents. In either of these situations, the key word is preparation. Hopefully you've kept all of the documentation to back up your last few tax returns. Tax advisors suggest holding onto such paperwork for seven years so you'll know where to look for it should you be audited.
- If an accountant or tax adviser filed your return, get him to help you prepare for the meeting. You might even consider having this person conduct the meeting on your behalf. If you filed your taxes yourself, you still might want to consult an attorney, certified public accountant or enrolled agent since any of these individuals can represent you before the IRS.
- The letter from the IRS should spell out what the agency is looking for. When you gather the requested documentation, make enough copies for the IRS, yourself and any tax agent, CPA or attorney who is attending the meeting on your behalf. That way, all of you can refer to the documents in question during the discussion. Also, if you're consulting a tax professional for help, he can help you determine what types of documents you'll need and what types of questions you'll be asked. By anticipating these questions and practicing your answers, you'll feel more comfortable during the meeting, which may give the IRS agent a more favorable impression of you.
- Don't wait until the meeting to look over the documentation. Know what information the IRS will be looking at and anticipate questions that might be asked about it. Have backup materials ready to answer those questions.
- Let the IRS lead the meeting. Don't bring up anything that the IRS agent does not bring up. Answer only the questions you're asked. Even an innocent statement made by you could lead an IRS agent to expand his investigation into your finances.
- Don't be defensive. The meeting is unlikely to be pleasant, and you may feel emotional about having someone question your finances. Don't allow those feelings to take control of the situation. Try to remain calm and pleasant when dealing with the IRS agent. If you feel you are unable to remain calm, it might be a good idea to have a tax professional handle the meeting without you.
When faced with an audit, it's easy to conjure up visions of all the things that can go wrong as a result of the investigation. But by being prepared, you can walk away from the experience having lost only a minimal amount of time in the process.
