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Old 05-27-2013, 09:28 AM
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Small IT Business & IRS Audit

I run a small IT business & was informed about an IRS Audit. Are there any tips on how to prepare for this. I have never experienced this personally or professionally.

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Old 05-27-2013, 11:22 AM
Join Date: Oct 2010
Posts: 5,236
Originally Posted by patriciaowens86 View Post
I run a small IT business & was informed about an IRS Audit. Are there any tips on how to prepare for this. I have never experienced this personally or professionally.

You need to talk to the auditor only enough to refer him/her to your tax professional, and get organized. Just because your income tax return has been selected for audit, doesn't mean "they are out to get you". It could mean that the computer has selected your number for audit. Perhaps, your biz is part of a program to "test" compliance in the industry. The IRS is supposed to tell you why your return was selected for audit. When income tax returns are filed in the IRS Service Center, the information on the return is put into the computer. Each return is assigned a numerical score that is arrived at by determining how far above or below the average each of your deductions are. Each deduction that you have taken that varies from the norm is added together and the total amount determines your numerical score. The scoring system is a secret but experience tells us what makes the score go up:
Low gross profit margin; High auto expenses; High business use of autos;Number of autos used in business; High travel and entertainment;Little or no profit from business operations. Recently, interest expense has become a high-risk audit item. The IRS is auditing interest on businesses to assure that it is business and not personal interests. Before long, they will be enforcing those complicated "interest tracing rules."The higher the number, or the more your deductions vary from the norm computed by the IRS, the greater the chance of error on the return. Therefore, returns with higher numerical scores are the ones more likely to be audited. It is also your prerogative to ask why your return was selected for audit. Even though the bulk of the returns audited are selected because of a high numerical score, other criteria for selection include informants, your relationship to another taxpayer who is being audited, being part of a special groups that has been singled out for auditing, or being part of an IRS project such as the auditing of all employers who use contract labor. Correspondence Audit is a letter from the IRS Service Center requesting that you send in copies of your canceled checks and/or receipts in order to verify certain deductions on the return. This type of audit is reserved for small, simple tax returns and most likely your business will not be audited in this manner.

The notice of an office audit also arrives by mail. The letter identifies specific items on the return that are in question and requests that you or your representative to bring certain documents to the local IRS office for the auditor's examination. If your business is a small, sole proprietorship with sales under $500K, you may be subjected to this type of audit.

Timeliness makes it look as if you have nothing to hide and it limits the amount of time the agent spends looking at your information. In both instances, the risk of the agent/auditor finding a "mistake" has been reduced.
You can choose the handling the audit by yourself, have a representative go with you, and have a representative go in your place. If choose to handle the audit yourself or to have a representative accompany you, you increase the risk that the agent/auditor will ask questions that you would prefer not to have to answer. There is no such thing as idle conversation with a person from the IRS. Each question has a purpose and that purpose it to get information which will indicate that you have underreported your income or over stated your expenses.If you do choose to handle the audit yourself, you need to be organized.Give them only the documents needed to support the deduction being questioned.Never give the IRS agent more or less information than is requested. Answer questions honestly, but briefly.Never give the IRS the only copy of a document.Do not leave your original records with the IRS.Don't chatter or exchange casual conversation. Each comment only gives them more information.Stay calm! Don't be argumentative or belligerent.Insist on getting copies of information in their files or copies of anything that you sign. Better yet, wait until your representative has time to review the document before you sign it.
Whether your return was prepared by in-house personnel or a paid preparer, you are responsible for it's contents. You need to review all tax returns closely before signing them and mailing them to the IRS. Should the return be selected for audit, how you or your representative handle the audit will be determined by your attitude toward the IRS - Is it hostile, defensive, one of fear, or one of co-operation? Items questioned - Has the IRS selected high-risk items or is there risk that with additional probing the high-risk items will be "discovered?"

Records - Are most records available or have some been lost, stolen, or destroyed?MONEY - The cost to you in professional fees will be significant but the cost in terms of time and stress will be greater to you if you have no representation.

Less than 2 to 4 percent of the tax returns that are filed are audited. If you number comes up, be prepared to get things organized and to present your business in the most favorable light possible. A big part of handling an IRS audit is communication and the ability to manage difficult personalities. If you have these skills, you may want to handle the audit yourself. If not, you may need a "hired gun!" The overall goal of your representative will be to handle the audit in such a manner that your "exposure" is decreased. By exposure, I mean the risk that the agent will probe into the areas will your business is vulnerable, where the high risk items are, or where the most questionable deductions area. Because the laws are subject to interpretation, there is no such things as a "perfectly" correct tax return. A representative can conduct the audit in such a manner as to "limit the agent's scope" or limit the amount of information the agent sees or requests to examine.

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