- Bank statements
- Canceled checks
- Receipts for charitable donations, business expenses and items sold at a gain
- Electronic records
- Payroll books
- Appointment logs
- Automobile records (if your automobile pertains to your business)
- Travel and entertainment records
- Mortgage statements
- W-2 forms
- 1099 forms
- Articles of incorporation
- Minute books
- Loan records
Organize the records by category and by date, so the auditor can quickly and efficiently find the information he or she needs. If you can't find a document by the designated appointment time, Erb says it's all right to call the IRS office and ask for an extension. "In terms of timing, if you're being cooperative and forthright most agents will extend the time you have to provide things, if you ask," she says.
Most documents you need can be requested from your bank or from the government itself. If you absolutely can't find a document, Erb says, sometimes you need to "face the consequences," which is why it's important to start being a tedious record keeper before the IRS comes calling.
Dig Deeper: Preparing for an Audit
How to Survive a Tax Audit: During the Audit
When you meet with the auditor, you're entitled to have representation with you. Baiardi encourages all business owners to consult a tax professional, because you need to make sure you're answering only the questions the auditor asks and nothing more.
Schneier agrees: "Answer the questions, but don't offer information you don't have to offer. Be straightforward about it, but don't manufacture excuses. The agent really doesn't care."
It's wise to keep quiet for the most part. Erb knows all too well how frustrating it can be to be interrogated about your business, but she says, "Keep in mind if they're asking you lots of questions, that's not a bad thing. They're giving you the opportunity to prove them wrong."
If, however, you (and your advisor) feel that the auditor's line of questioning is not relevant to the initial issue they were sent to investigate, Schneier says it's okay to speak with the agent's supervisor.
The IRS does allow you to make an audio recording of the audit examinations. If you choose to do this, you must give the IRS agent a written notice 10 days before your appointment, stating that you will be recording the meeting.
Remember, the most important thing is to prove is that there was no clear intent on your part to defraud the government. "Most of the time people are not willfully not paying taxes," Erb says. "Being sloppy about filing doesn't mean you're not going to get a penalty, but it means you might not get charged with intent to evade taxes."
Dig Deeper: Audit Survival Tips
How to Survive a Tax Audit: After the Audit
The auditor will issue your examination report, listing any penalties you owe with the interest rate built into the cost. In some cases, the auditor will decide there is no change to your return. If you agree with the report, you can sign and pay whatever you owe, ending the audit process right there.
If, for some reason, you do not agree with the report, you are entitled to an appeal. Your agent will send you a letter explaining your right to appeal, and you must respond to the letter with your decision no later than 30 days after you receive it.
Though appealing a penalty may be your initial impulse, Erb says it's important to remember that the cost of an appeal may be comparable to the penalties you owe. "Most of the time people make a lot of noise about appeals, but it's very rare that they actually do it," she says.
If you're not able to pay the penalty, some businesses may be eligible for an offer in compromise (OIC), which, according to IRS, is "an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed." This payment may be made in installments or an adjusted lump sum. The IRS will only accept your OIC, however, if they believe the amount you offer to pay is equal to the amount you're able to pay, also known as your "reasonable collection potential." Find additional details about OICs here.
After the audit process is settled, Schneier says, "It's likely the IRS will review your subsequent returns to make sure you don't fall into the same pattern again." In other words, if you've been audited once, you're more likely to be audited again, so it's important to pinpoint the mistakes you made that raised the red flag to the IRS in the first place.
Erb says if the error was made by a third-party tax professional, it's wise to seek tax advice elsewhere. In fact, she says, "Having a crappy accountant can be a reason to have some penalties abated." Make sure you reassess the accounting software you use, and be more attentive to recordkeeping.
"If you're running a business successfully, getting audited is not the end of the world," Erb says, noting that it may actually help you improve your business operations. "You have to identify what was the thing that got me in trouble, and how do I make sure that thing doesn't happen again?"
Dig Deeper: Tax FAQs
How to Survive a Tax Audit: Resources
For the IRS's step-by-step explanation of the audit process, click here.
Find an explanation of the tax gap here.
Check out Erb's TaxGirl blog here.
