Each year it’s necessary to prepare relevant paperwork for the IRS (Internal Revenue Service) and pay all taxes due.
When you’re running your own business or are self employed, there are stringent penalties for failing in this so it’s important to be well organized to avoid being left flapping around come year-end.
Also, you may be selected for an audit by the IRS, which can be random or prompted by other factors. Whatever the reason, you’ll be expected to present your accounts and supporting information such as paperwork including W-2, W-3, 1096 and 1099 forms to enable an accurate audit to take place.
The dreaded audit?
Some automatically think an IRS audit is at best arduous and at worst harrowing, but notification that the IRS want to investigate further may not mean a full auditing. It could be one or two discrepancies that simply need ironing out, so try not to worry.
If you’ve always kept accurate and thorough records, it will provide more peace of mind.
In general, IRS audits have focused more on the wealthy, with a one in five chance of being audited if you earn $10 million or more, as opposed to one in 100 for the majority of tax payers.
Understand the audit
The IRS will issue you with an audit notice explaining what it’s looking to examine and the information it needs you to provide.
Ensure you understand fully what is being asked. Basics, such as your deadline to reply, should be noted and adhered to.
Hire a professional advisor
You may already have an accountant or tax specialist who helps with your tax affairs, if not then prior to an audit it’s important to hire an expert.
Ensure they’re capable of representing you at audit meetings. An experienced and qualified tax professional will be used to dealing with IRS audits.
Good record keeping
It may seem a case of acting after the horse has bolted if your record keeping isn’t the best and now the IRS have been in touch, but do what you can to make your records as thorough and as well organized as possible.
Go back through previous records – you should have kept the last six years’ worth – and ensure they’re complete and presented logically as the IRS may ask to see these as part of its auditing process.
Primary records are your bills and receipts to support expenses claims. It’s often expenses that the IRS seek to check.
If your record keeping has been lax, then make the best of it before the audit by seeing if certain records can be procured if you don’t have them. For example, receipts or invoices may be available from relevant providers if you’re missing anything.
As well as presenting your records in as full and easy to follow way as possible, be fully prepared for the meetings with IRS personnel.
Answer questions as fully and as cooperatively as possible but don’t feel obliged to offer extra information unless asked. Your tax professional should accompany you. Let them lead – they’ll likely be better at handling trained IRS people than you are.
Know your rights
An audit is akin to a small trial, so keep your answers to direct questions relevant and brief – simple ‘yes’ or ‘no’ answers are ideal where possible as opposed to rambling on too much and possibly opening the way for more probing.
If you disagree with the findings of the audit you can request a meeting with the IRS appeals division.
Understanding some of the red flags that cause the IRS to instigate an audit may help, too.
To read more on topics like this, check out the money category