As tax time approaches, so does the fear of an audit. The IRS may choose to perform an audit for any number of reasons — from a problem with your company’s returns to continual business losses over a long period of time, raising the question how you made a living during that time. A small business’s travel expenses can invite the IRS’s attention. Large deductions for travel, entertainment and automobile expenses that are not consistent with the company’s sales volume may trigger an audit.
Just as the cause of an audit can vary, so can the scope of the audit. The IRS may want to audit the entire tax return, or just a particular part that is causing confusion — like the travel expenses. Regardless of the reason, preparation for the audit is crucial.
Most often, the IRS will not give you much time to prepare for the audit — typically scheduling it a week or two after notice. In addition to the notification, you will also be told what is being audited. If only a portion of your return is being audited, then bring the materials that pertain only to that section.
No matter how perfect your records are, it is wise not to represent yourself; rather, let your accountant represent you and answer all the questions presented by the auditor. This is because you have to know why the auditor is asking their questions in order to provide an appropriate answer, which requires knowledge of all the tax laws, not just the ones pertaining to your audit.
Lauren Nelson, a CPA from Fort Collins, Colo., recommends that you not speak at all during an audit unless directly spoken to, otherwise you could unintentionally open the door for further investigation of your books.
Another option is to give the accountant power of attorney so that you need not be there at all. The advantage of this method: It gives the accountant more time to respond to questions. Instead of turning to you and having you blurt out an answer — which may be the wrong one — the accountant can call you and discuss the question with you at length, and in private.
Present or not, the most important thing you can do in preparation for the audit is to recall all of the events from the previous business year, who was employed at the company at the time, and any problems encountered throughout the year, advises Nelson.
A well-prepared audit may last only a few hours. If you are not ready for the auditor, then the process will not only take longer, but it will be more unpleasant than it needs to be.
When the audit concludes, the IRS agent will cite any problems that were uncovered during the audit. You will be informally notified of any adjustments at that time, and then the agent will file a formal report. The result of an audit can be appealed if you feel that the agent has made an incorrect determination.
Remember, in addition to the interest that applies to all adjustments, the IRS agent can assess any penalties they feel are justified — which is why you should try to make the experience as pleasant and comfortable as possible for the accountant, IRS agent and yourself. With luck, it will all be over quickly and painlessly.