By Mike Smith

Few things are quite as daunting as receiving a letter from the Internal Revenue Service informing you that you or your business is the subject of a tax investigation. Even if you’re convinced your tax returns are accurate and have been filed on time then the process can still be stressful, but if you have a suspicion there could be mistakes, the process can be terrifying.

Sone tax investigations are the result of information uncovered during an IRS audit, while others may be triggered by a tip-off from employees, business associates or other third parties. Even social media can be a potential source of evidence when initiating a tax investigation.

Whatever the source of the suspicion, it’s essential you are prepared to defend yourself and understand what you need to do to give you and your business the best chance of emerging unscathed. Even if you are convinced you have nothing to hide, there are still certain steps you must take…

Keep calm

The first thing you need to do is keep calm and resist the temptation to contact the investigations team. You may feel you have nothing to hide and want to clear up any matters as quickly as you can, but as with any investigation, anything you say now could come back to haunt you later on. You should also be careful what you say to employees, business associates and even friends and family as they could be interviewed as part of the investigation process.

Seek professional advice

The next thing you need to do is to find some trustworthy professional advice. It could be that your current accountant is well-versed in tax matters and understands the investigations process. If not, you should contact a specialist tax advisor. They will be able to review your accounting and tax records and identify areas that could be a cause for concern. They will then be able to advise you on how to proceed to resolve any issues and minimise penalties.

Consider whether there could be an anonymous source

A good proportion of IRS investigations are based on information provided by third-parties. Tip-offs can come from a wide range of sources. That includes everything from former spouses and disgruntled employees to business partners where a relationship has turned sour. The information they provide is not always accurate and can be part of a vendetta.

If you do have your suspicions about a potential tip-off, you should not contact the individual or make accusations as this will only make matters worse. However, it could shed some light on the nature of the information provided.

Cooperate with the investigators

Generally, you should not have to speak to the tax investigators directly if you don’t want to. Instead, you can appoint a tax accountant or attorney to act on your behalf. You should also not agree to attend a meeting without professional assistance as you risk worsening your position.

However, during the initial stages of the investigation, it’s likely that the IRS will request information for you. You should respond to any reasonable requests they make (your adviser will help you determine what constitutes a ‘reasonable request’) in a timely manner. If the investigators believe you are trying to delay the investigation by not complying with their requests, it will be reflected by the severity of the penalties you receive.

Don’t lie

With so many potential sources of information, it’s likely the IRS knows a lot more than you might think. Lying will only prolong the investigation and make matters worse when it comes to determining appropriate penalties. If you know there are errors on your tax return then you should consider making a voluntary disclosure.

Make a full disclosure

If the allegations being made against you are true then you should consider making a voluntary disclosure at your earliest opportunity. In some cases, taxpayers who make a full disclosure about their underpayment of tax may be able to avoid criminal charges in favor of a civil audit.

Don’t do it again

If you have made an error that leads to an IRS investigation then make sure you don’t do it again. The IRS does not look favourably on repeat offenders, so take extra care when completing future returns and make sure they’re submitted on time. If you’re not confident in your ability to file accurate returns then hire a professional.

Mike Smith is a senior director of and an insolvency expert of 4 decades.