Strategies for dealing successfully with a tax audit

Imagine if today’s mail brought a letter from the IRS advising you that you or your small business are being audited. What would you do?

Please bear in mind that a notice to appear before an IRS examiner is not a presumption that the IRS wants to challenge a deduction or deductions that you’ve taken. It generally means that the government wants to know more about the deductions you claimed or the income you didn’t claim.

How did you get flagged for an audit? Basically, there are three ways that filers are selected. Audits are selected via computer scanning, random selection or “bounty hunters” (auditors who are assigned to look for red flags in filings). Your chances of being audited also increase as your income increases or if you are self-employed.

Remember that there’s no need to hit the panic button if you receive an audit letter from the IRS. Follow these guidelines and you will be as prepared as you can be:

• Whatever you do – don’t ignore your tax audit notice. Keep in mind that you will have some time to work with. You’ll have at least several weeks, and a postponement usually can be arranged, so if you need it to gather information requested there’s no need for alarm.

• Seek the assistance of a professional. A tax expert, particularly a certified public accountant, knows the audit procedure, what kinds of supporting material — such as explanatory narratives and letters from employers — will help, how to present your arguments to the examiner and how to have your case transferred to a more convenient audit center, if this seems appropriate.

CPAs also are the only legal entity allowed to accompany and/or represent you on an audit. Practice total candor with your adviser and provide them with good records.

• If you decide to handle the audit on your own, be prepared. Make arrangements to hold the meeting at the IRS offices rather than at your home or office. Keep any and all conversations to the point, be strictly honest and find out all you can about IRS rules and regulations covering the matters at hand in your audit.

• The more complicated your return, the greater the likelihood that
someone at the IRS may want to speak with you about it.

• Get organized and keep good business records: payroll records tax reports and payments; sales records; income and expenses; and accounts payable and receivable.

• Professionals know the rules of the game. They can prevent you from making innocent mistakes and help you deal with the most complex system ever devised by any people — the U.S. taxation system.

The good news is that you’ll learn the audit results right away. If you win, that’s it. If you lose, you have the alternative of paying up or entering into the appeals process. There are different routes. One is an appeals structure through the IRS itself, another is directly to the U.S. Tax Court, and still another is through the judicial system — the U.S. District Court and the Court of Claims.

Steve Feinbeg is owner of a Fiducial franchise in Londonderry, specializing in accounting, payroll and tax planning for small to mid-size businesses.