Audited? Don't Panic! Here's How to Handle it.

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Nothing strikes fear into the hearts of small business owners quite like the a-word. Whether it’s the IRS or state taxing authorities, having someone tell you they want to audit your records is a fraught time even for the most organized business owner.

You think you filed your tax returns correctly, but what if you made a mistake? Could you have to pay a huge penalty? Could you even go to jail? 

Unfortunately, small business owners are a bit more likely to be audited than the general public because they self-report info on the Schedule C. It’s tempting to panic when you see the word “audit” but don’t. Just like with many big, bad boogeymen, this one isn’t as scary as it seems once it knocks on your door. 

A FEW TIPS TO HELP YOU HANDLE YOUR AUDIT WITH FINESSE... 

READ THE LETTER CAREFULLY

Think of an auditor as a man in a black suit and dark sunglasses whisking you away to a non-descript office complex to go over your entire life? Believe me! It isn’t as bad as all that. 

In fact, the vast majority of audits are carried out via the U.S. mail. In fact, the IRS will never call or email you, so if someone claiming to be from the agency contacts you in any form other than a letter, be wary. 

If you do get a letter, keep in mind that most times, the IRS is only auditing a portion of your tax return. That said, read the letter carefully. In most cases, the IRS simply wants clarification on one part of your tax return. Once you have answered their request they will let you know in writing what they’ve decided, and you even have a chance to appeal. See, that wasn’t so scary? 

Gather Documentation 

If the IRS or your state’s taxing authority comes calling, be prepared to back up your tax claims with documentation. If the audit is mileage related, for example, be prepared to show an auditor your mileage log. 

Do be careful about what you show an auditor. Only give them enough information to answer the question they asked. If you offer up more information, such as your whole “Taxes 2012” file, they are allowed to expand the scope of the audit. And nobody needs more trouble!
From there, be sure to send in any requested documentation by the deadline listed on your letter. 

Watch for Red Flags

If you must meet with an auditor, do not meet with him or her at your home. Instead request to meet at a local tax office or even, if you have retained one, your tax attorney’s office. 

Before you meet the auditor, know your Taxpayer’s Bill of Rights. If you feel at any time like the audit is going badly, you can request to pause and consult with an attorney. If the auditor mentions serious crimes, such as “tax fraud” then it’s in your best interest to consult an attorney. Fortunately, when you’re a small business owner simply trying to do the right thing you likely won’t run into such a dire predicament.