With the news media buzzing about the IRS targeting the Tea Party and other conservative groups for audits, small business owners are left wondering, “Could this happen to me?”
Audits have long struck fear in the hearts of taxpayers, but are especially daunting for small business owners who have more financial variables to manage. In fact, a recent Zogby survey of over 500 small businesses found that over half of respondents cited “anything to do with taxes” as the number one stressor of their business.
What should you do in the event of an IRS audit? Cloud accounting software provider Xero asked partner accountants Jody Padar, CEO of New Visions CPA Group, and Bruce Phillips, managing member Harshman, Philips and Company, for their top tips.
Don’t Panic: As daunting as an audit may seem, it is really not a catastrophic situation in the works. If you run a legitimate business, an audit is more of an inconvenience or annoyance than a crisis. Xero Partner accountant Jody Padar explains, “There are many different types of audits. More than likely small business owners will get what is called a ‘Correspondence Audit’ which is the lowest level audit from the IRS. The IRS sends the taxpayer a written request for additional information about a specific item or issue on a specific tax return. If the taxpayer can produce sufficient evidence to resolve the issue, the procedure is closed.”
Respond Quickly: Just because audits are unsettling does not give you license to brush it under the carpet. The sooner you address the situation, the sooner it’s over. But do it in a timely fashion, because lagging does not look good in the eyes of the IRS.
Don’t Go Alone: It is always a best practice to retain professional advice when served with an audit. It doesn’t necessarily have to be a tax attorney. It can be a CPA and EA (Enrolled Agent) or (theoretically, but not recommended) a family member. Basically, you want to have an intermediary between you and the government.
Know Your Story: An audit is simply the IRS wanting to understand your methods and hear the story of how your business operates. However, be strategic in how you tell your story so you don’t unintentionally raise any red flags. Rely on your tax professional to help you position your story. In many cases your tax professional will present it to the IRS and you won’t even have to be in the room.