8 Tips for Coping with an IRS Audit

As you have probably read, Internal Revenue Service and state departments of taxation audits are on the rise, and generally as your business grows, so does your chance of being audited. Moreover, other factors such as owning a business that receives cash or having large amounts of itemized deductions that exceed IRS targets can increase your chances of being audited. So if you are one of the “lucky” ones chosen for audit, here are some tips to help minimize the stress involved.

1. Call a CPA or enrollment agent. Their experience with IRS auditors justifies the investment by saving you tax, penalty and interest.

2. Ask for an extension of time. Extending the allotted time enables you to put your records in order in a timely fashion and without panic.

3. Do not host the audit. The IRS may want to visit your office briefly to see the operation; however, to avoid disrupting your business, ask to have the audit at your tax professional’s office.

4. Replace any missing records. If you are missing documents, you can replace them with duplicates or reconstruct if possible before the audit begins.

5. Do not speak until spoken to. Do not become friends with the auditor. Only answer the questions posed and don’t hesitate to ask for clarifications (agents love to go “fishing”), but do not volunteer any information.

6. Provide copies of documents. Do not provide any originals. The IRS is not responsible for the handling of documents and there is always a chance the documents could get lost.

7. Do not be afraid to challenge or negotiate with the IRS. Auditors often have to justify the audit. If an agent comes back to you with a change or modification to your return, challenge it. For example, if you have a company car and the auditor tells you that 65% has to be taxed back to personal use, negotiate that down to 35% personal use. The auditor’s findings are not etched in stone.

8. Know your rights. Review IRS Publication 1 prior to your audit. This will help you understand the audit process and the law behind the deductions being claimed. Publication 1 is available at www.irs.gov/publications/p1/index.html.

If you stick to these guidelines, your audit should move quickly and will hopefully result in a “no change,” and you will reduce any stress that may result from the experience.