Even if you avoid the red flags that typically trigger an audit, it’s possible that the IRS may randomly select your tax return for a second look. If you find yourself in the undesirable situation of dealing with the IRS, don’t panic. How you respond to the audit can meaningfully impact its results. To help, we’ve compiled a list of guidelines to follow if your business is audited so you can keep Uncle Sam happy and quickly return to business as usual.
Are You Aware of the Do’s and Don’ts of a Business Audit?
Do: Keep Financial Records Organized
During an audit, the IRS compares the tax return under examination to your records for the same tax year to ensure there aren’t any discrepancies or errors in what you’ve reported. The easiest way to expedite the process and build credibility with the IRS is to keep your financial records organized — they’re more likely to give you the benefit of the doubt if they identify an issue.
Before the audit, gather and make copies of the records you used to prepare the tax return under review. If the IRS is forced to estimate your income and expenses due to inadequate documentation, it could result in additional penalties.
Don’t: Throw Anything Away
Generally, the IRS reviews tax returns within three years. However, it’s typically considered best practice to maintain financial records for up to seven years. If you’re audited and lack supporting documentation, you can attempt to reconstruct it, but doing so may lead to additional questioning.
To be safe, keep good records and don’t destroy anything that you may need to substantiate any of your tax returns. If you can produce the requested documentation quickly, the process will go much smoother.
Do: Seek Help If Needed
If you’re audited, you have the option to attend the audit yourself, have a tax professional accompany you, or hire a professional to attend the audit in your place. If an outside accounting firm prepared the tax return, they should handle the audit at little or no cost to you.
Even if you prepared the return yourself, hiring a tax expert to represent you during the audit can be advantageous for building your case and responding to the IRS’s questions. At a minimum, consult a tax professional upon receiving the examination letter so that they can prepare you for the process ahead.
Don’t: Give the IRS More Than They Need
You’re only required to provide financial records to support the tax return under review. Giving the IRS more than they need can only hurt you. Similarly, only respond to the questions the IRS asks. Answer as honestly and succinctly as possible without divulging unnecessary information. If you’re not sure how to answer a question, make a note of it so that you can do your research and get back to the auditor with an accurate response.
Do: Know Your Rights
Before the audit, familiarize yourself with the Taxpayer Bill of Rights. If the IRS proposes additional taxes that you don’t believe you owe, you have the right to challenge their decision. If at any time during the audit you don’t think you’re being treated fairly, request a recess to consult a tax professional or ask to speak to your auditor’s manager. Finally, always have an expert review the IRS’s findings before you sign anything.
Don’t: Ignore the IRS
If your tax return is selected for an audit, the IRS will notify you by mail on official letterhead. Once you receive the letter, you have 30 days to respond. Typically, the IRS will recommend specific changes in the body of the letter. If you agree, you can simply pay the amount due. If you disagree, you’ll likely need to provide additional documentation and meet with an IRS agent. The worst thing you can do is ignore the IRS, so make sure to open any mail you receive from the agency and respond in a timely manner.
If you file a tax return every year, you run the risk of being audited. Even a routine business audit can be stressful, but there’s usually no reason to panic. By following a few basic guidelines and keeping your financial records clean and organized, you’re more likely to be prepared when and if the IRS decides to pay you a visit.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
