The word “audit” brings fear to most businesses. Navigating tax law for the first time can be stressful, time consuming and potentially expensive especially for small business owners. James Guarino, a certified public accountant and a partner at Moody Famiglietti & Andronico in Tewksbury, Mass., shares these tips for making an audit less painful.
1. Keep things in Perspective
Most people imagine a full scale probe into their finances when an audit is triggered but this is rarely the case. It is often a small math error that raises concerns. For example, the supporting documents such as 1099s may not match the figures on a company’s return. The problem can easily be fixed by correcting the 1099 and recalculating the tax on the form.
Sometimes a single loss or write-off can raise a red flag for the IRS. “Professional real-estate investors can claim losses and write-offs that casual investors might not be able to,” Guarino explains. “But you have to meet certain criteria to be a professional rather than run-of-the-mill investor.” If the activity you have listed doesn’t fall into the normal range, the IRS will ask for further documentation to confirm that it was a legitimate claim.
2. Get help.
An audit can be emotionally straining, especially when you feel as if you are defending your business. Hiring an attorney or CPA to manage the audit will remove you from the situation. They will be able to identify issues that are not as black and white as the IRS represents them and fight for you. If the IRS alleges that money is owed, your CPA is capable of arguing those points on your behalf. Many times they end up winning because the IRS does not want the case to go to court.
3. Provide exactly what the agent asks for.
It can be tempting to be forthright with any information that may be helpful in the audit but less is always more. Restrict your answers to the matter at hand and the audit will end quickly. If you talk directly to the audit agents, Guarino says, answer with direct speech: “Yes; no; I’ll look into it,” he says. “Any tidbit of information that you offer could bring things to the auditor’s attention that he might not have thought of otherwise. That could open a can of worms.”
This is another example of how an attorney or CPA could help you in an audit. They are trained to answer questions in a limited fashion and will keep the process focused and moving forward.
4. Don’t assume the IRS is right.
Mathematical errors are just as easy to make for IRS agents as they are for you. They could easily miss an important document or, when a law is open for interpretation, choose the side that benefits the IRS. You have the right to argue your point of view and provide supporting documentation for each question raised.
5. Decline requests to extend the IRS’s deadline.
The IRS has a statute of limitations that restricts an audit to the three years previous. Because of the high volume of cases, the IRS often asked companies to extend that deadline. Say no. Although the letter may seem more like a requirement than a request, you do have the right to decline the extension. Consult at tax advisor that can decode the legalese before formulating your response.
A request for a waiver will not, however, release your from the audit. The IRS agent will do as much as possible in the time allotted and let you know if money is owed.
Need help navigating an upcoming audit? Take a look and Beck and Company CPA’s Audit Services.