Related topics

What Happens When You’re Audited

March 21, 2002

NEW YORK (AP) _ When the notice arrives from the IRS telling you that your business return is about to be audited, of course you’re going to panic.

But try to remember three things that should help you feel a little better.

First, accountants and tax attorneys say they’ve found the IRS, even during audits, to be much more human and easier to deal with than in the past. Second, what the IRS is looking for is a good-faith attempt to comply with tax laws. If you can show you’ve done that, the audit is unlikely to be the horrific ordeal you’re expecting. Third, and most important, you don’t have to handle an audit yourself.

It also might help to know what an audit is all about and how you can make the process easier.

Unless one of your employees is an accountant experienced in IRS audits, the best thing you can do is to turn the matter over to a CPA or other tax professional. Yes, that can be expensive, but trying to do it yourself will cost your firm dearly in terms of lost business opportunities and customer relations because you’ll be distracted by the audit.

Trying to meet with the IRS on your own could also land you in trouble if you slip and say the wrong thing.

Mickey Ison, managing partner of Bean & Ison, an accounting firm in Memphis, Tenn., recalled a the case of a client who decided to meet with the IRS agent herself. She and her husband had a small farming operation as a sideline, and as she chatted away with the agent, she cheerfully declared, ``When my husband gets on that tractor, he just loves it! It’s kind of a hobby for him.″

That was all the agent needed to hear to decide that the farm was no business, and disallow all the couple’s business deductions. When she turned to Ison for help, he was unable to undo the damage.

``Just saying a word can get you into trouble,″ Ison said.

Soon after you tell your accountant or lawyer that you’re being audited, you’ll need to sign a power of attorney that allows your representative to discuss your case with the IRS.

After you’ve done that, ``get out of the way and let the representative do his job,″ said Dale Fashinpaur, a partner with the accounting firm CBIZ Business Solutions in Akron, Ohio.

Ison said the next step for the CPA or lawyer is to call the IRS agent assigned to the case to find out what records and documentation are to be examined during the audit.

``I’ll probably go to the client’s office to gather up the information that the agent wants, bring it to my office ... and make it as organized as possible,″ he said.

You might find you never have to meet the IRS agent. Ison said his clients’ audits are usually done in his firm’s conference room; the agent arrives, starts looking over the client’s records and documentation and asks the CPA about any item that needs clarification. How long this process takes depends on the size of the company and the number of items on the return that are being audited.

There are times when it helps for the agent to meet the business owner or visit the business itself. Charles H. Rosenblatt, a CPA in Los Angeles said that ``frequently, if they meet the taxpayer and get to know them, it works out well.″

Rosenblatt said of a client who was a horse owner, ``I brought him along because he knew every horse he had ever owned ... he was really able to impress the IRS agent with his knowledge of the business and that he’s not just doing this for fun.″

If you do meet with the agent, don’t volunteer any information. ``Answer their questions, but don’t answer more than that,″ Fashinpaur said.

After the agent is done, he or she will give an assessment to your CPA or lawyer, and in a few weeks to a few months, a preliminary report is issued. Your representative is likely to make suggestions _ particularly if the finding is against you _ and the agent will discuss the case with a supervisor.

After a final proposal for a settlement is made, you can accept it or appeal it. If the appeal is rejected, the next stop is likely to be tax court _ a step that probably makes sense only if a great deal of money or a question of tax law is involved.

The best way to make an audit easier for everyone is to have records that are well-organized and that don’t raise further questions.

For example, if the IRS agent wants to see sales orders, be sure they’re in numerical order and all there, even the ones that were voided, said Steven Botwinick, a CPA in Rochelle Park, N.J. Missing sales orders or receipts can raise a question of whether the transaction was paid for in cash, and the cash in turn not reported as income.

What if you just tossed out the voided orders? Try to reconstruct the transaction as best as you can and supply a substitute document explaining the circumstances.

Accountants say it’s a good idea to be upfront with IRS agents about problems such as missing documents or errors on the return.

``Sometimes, I’ll walk in there with an adjustment,″ Rosenblatt said. ``If you give them something right up front, you’ll find the audit goes much easier.″

Audits generally are less onerous than in the past because the IRS has become more taxpayer friendly, accountants say.

``They’re more cooperative and understanding _ they do work with you,″ said Botwinick, the New Jersey CPA.

But it’s also true that if you’ve run your business poorly, or gone beyond the law, you’re likely to face penalties.

``If you’ve taken positions that are beyond what’s reasonable ... you have reason to be concerned,″ said Fashinpaur, the Ohio CPA.

Update hourly