Small businesses are more likely to get selected for an IRS audit, because many of them are unfamiliar with business tax rules and often conduct transactions in cash, which leaves more room for errors.
In 2012, the IRS audited the returns of approximately 346,500 small businesses, which means that any small company has a real chance of getting audited. Whether or not you will receive an audit notice in the future, it is better to be prepared than sorry. Here are five useful tips on how to survive a small business audit.
Prepare the Required Documents
Most IRS audits are not line-by-line examinations of tax returns. Surviving an audit can be as easy as providing a missing document or correcting an error on your 1099. The reason for the audit is clearly stated in the audit notice, so all you need to do is prepare the relevant supporting documents.
Avoid showing other years’ returns to the IRS auditor, unless you are specifically requested to do so. The auditor may make adjustments to those years’ returns too if he or she finds anything questionable on them.
Learn About Your Rights
Knowing your rights enables you to defend yourself and negotiate more effectively during a small business audit. You can find out about the Taxpayers’ Bill of Rights by reading the IRS Publication 1 and do research on tax law issues using various IRS publications and tax guides.
Be Brief and Direct
It is essential that you try to refrain from volunteering information during the audit. Provide the exact information requested by the IRS auditor, no more and no less. The more information you give, the higher the chance that he or she will think of something that can lead to a more extensive probe. It is advisable that you provide answers in a brief and direct manner throughout the audit.
If you feel that certain disallowances can be negotiated, do not be afraid to do so. Instead of trying to ask for a reduction in the amount of tax you need to pay, you should focus on tax issues such as the permissibility of certain tax deductions.
Also, remember that IRS auditors can make mistakes too. If you find that your auditor has made an error, do not hesitate to point it out to him or her.
Get Professional Assistance
Undergoing an audit can be stressful, especially if your company’s tax situation is complicated. Hiring a tax lawyer or accountant can make the ordeal much easier and even lower your tax bill.
There are many gray areas in the interpretation of tax laws and financial values, and IRS auditors will make decisions that are beneficial to the IRS. An experienced tax professional can identify these gray areas and defend you against inappropriate and unfair decisions.
A small business audit can be tedious and time-consuming, and it can potentially cost you a substantial amount of money. Following the tips above can help you achieve a successful audit outcome.
Have you ever been audited? Share your tips for getting through the situation with your fellow readers!
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