Nobody Wants to Be Audited
Whether you’re Donald Trump or the Dan the plumber, nobody wants to be audited by the IRS. Auditors are trained to scrutinize your business records, in order to ferret out errors and inconsistencies. It’s their job to make sure you’ve paid every penny, and they are very good at their job.
The IRS will claim back taxes and assess a penalty on any unreported income they uncover. It doesn’t matter if the omission was accidental or intentional, but if an audit reveals evidence that suggests you have committed fraud in order to conceal taxable income, then you could be facing steep fines, criminal prosecution, or jail time.
If you are being audited, it is always best to hire a tax professional…
And here’s the worst part: Even if you’ve reported every cent, you can still be audited. That’s why every business owner needs to have an Audit Action Plan. With proper planning and a clear understanding of the expectations of the agency, you can significantly improve your odds of emerging from an audit unscathed.
A quick note: Auditors are not your enemies, but their methods are imperfect, and it is easy for business owners to become frustrated during an audit process. If you are being audited, it is always best to hire a tax professional to mediate between your business and the IRS.
7 Insider Tips: Getting Through an Audit of Your Business
- File on Time: One of the best ways to stay on the IRS’s good side is to file your annual return on time. The IRS levies a steeper penalty for late returns than for late payments (go figure).By staying current with your annual returns, you stand to lose less money and you reduce the chances of your business being audited. The penalty for late returns is 5% per month, and the penalty increases if the IRS has just cause to believe that you have intended to defraud the government.
- Don’t Play Games and Keep It Simple:If you are running separate businesses, then you need to record revenue and expenses for each business individually.When an auditor looks at your bank statements, he or she will compare your bank deposits for the year with your reported income, and if the numbers don’t add up, then the agent will demand an explanation.By mixing personal assets and business income, or moving money between businesses, you greatly increase your chances of alerting an auditor to potential inconsistencies.
- Keep Detailed Records: Self-employed individuals are frequent targets of audits. The best way to protect yourself in the event of an audit is to keep all your records and receipts for a minimum of three years after you file a return.If you get audited and you have thrown away last year's receipts, then you could wind up paying a big bill, plus interest and penalties.
- Respond to the IRS Immediately: You can’t ignore the IRS. Your taxes are a debt, and the IRS, like any creditor, will not rest until you’ve settled your tab.Luckily, the IRS would rather work with debtors than file expensive, time-consuming lawsuits, so by being proactive and diligent in your communications with your auditor, you can improve your chances of surviving the audit with your bank account intact.
- Use the Taxpayer Advocate Service:The Taxpayer Advocate Service is a quasi-independent office managed by the IRS.TAS helps taxpayers and business owners resolve difficult audits. You can request assistance from the TAS by filing a form 911 or calling their customer service line.
- Make an Offer: Once in a while, the IRS will be willing to settle a tax debt for less than the full amount owed, especially if you have cooperated during the audit.There are a number of good reasons why the IRS might entertain a fair offer, but make sure you are giving them enough bait—never offer less than 20% of your debt.
- You Can Appeal!: After everything is said and done, you have the right to schedule an appeals conference if you believe that the IRS has wrongly penalized your business.Keep in mind that interest and penalties accrued during the audit will continue to compound during your appeal. In other words, don’t ask for an appeal unless you think you have a fighting chance of successfully pleading your case.
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