In terms of situations you’d rather not find yourself in, being the subject of a small business tax investigation probably ranks quite high. The first you’ll usually know of an impending tax investigation is a letter from the Internal Revenue Service (IRS) arriving in your mailbox. This is actually an important point because the IRS always sends letters and notices by mail.
If you receive an email purporting to be from the IRS then it’s a scam.
Most communications from the IRS will be something you can deal with simply by reading the notice and responding accordingly. However, in some instances, usually after information has been uncovered by an IRS audit or a tip-off has been received from a third-party, you may be informed that your business is the subject of a tax investigation.
Understandably, this situation can be daunting and stressful, but it’s essential you act appropriately from the off and prepare to defend yourself. Even if you’re sure you have nothing to hide, you need to take certain steps to give you and your business the best chance of emerging unscathed.
If you have been informed that your business is the subject of a tax investigation, it’s likely you’ll be tempted to call the investigators immediately to clear up any matters as quickly as you can. Don’t!
Even if your tax returns are squeaky clean, the investigation will follow a prescribed course and you will gain nothing by contacting the IRS now. If anything, you risk incriminating yourself further by saying something in haste that you may regret later on.
At this point, the only person you should be speaking to is a professional advisor. You should even be careful about what you say to employees and business associates as you never know where a tip-off might have originated from.
Speak to a professional tax advisor
If your accountant is well-versed in tax investigations then they could be a suitable source of advice, otherwise, you should get in touch with a specialist tax advisor with experience of the IRS investigations process.
A tax advisor will be able to determine the particular area(s) of concern from the initial contact and review your accounting and tax records with you to try and identify any issues. Based on their findings, they will then be able to advise you on how best to proceed.
Is it an inside job?
That probably sounds a bit dramatic, but it is worth considering whether the investigation could be the result of a tip-off from someone you know. Tip-offs can come from a wide range of sources. That includes disgruntled employees, business associates, creditors, former spouses and even family and friends.
In many cases, the information the IRS receives is not accurate and is simply part of a vendetta.
If you have your suspicions about the source of the tip-off then you should not contact the individual as it will only make matters worse. Instead, you should think carefully about the type of information they might have had access to as that could shed some light on the nature of the investigation.
Cooperate with the investigation in full
Being uncooperative and obstructive will only prolong the investigation and make any financial penalties or punishment you receive worse. In the early stages of the investigation, the IRS will usually request certain information from you.
You should respond to the information request in a timely manner and provide the documentation the IRS requires. Working with a professional advisor will help you determine what constitutes a reasonable request, as sometimes the IRS may ask for details they are not entitled to.
If you know there is something wrong with the tax returns you have filed then honesty is always the best policy. It’s likely the IRS knows a lot more than it’s letting on. So, if you try to cover up any accidental or deliberate errors you may have made, it will only make the situation worse.
Making a voluntary disclosure at your earliest possible opportunity will be taken into account when it comes to determining an appropriate penalty and will bring an end to the investigation more quickly.
Keep your nose clean
If you have made an error on a tax return that results in an IRS investigation then you must ensure mistakes are not made again. Even if the first offence was a careless mistake rather than a deliberate omission, the IRS takes a dim view of repeat offenders and any penalty you receive will reflect that.
If you’re not confident in your ability to file accurate and timely tax returns in the future then you should consider hiring a professional.