No one likes to be audited by the IRS. Most tax audits, however, are just requests for more information and, as long as you have the appropriate documentation, they can be a breeze.
As a small-business owner, you are required to keep original receipts and invoices for all of your transactions on both the income and expense sides. For simple audits, such as providing backup for a line item, you can deal directly with the IRS. For more complex audits, however, it makes sense to involve an accountant.
Here are four ways to make an audit easier for you and your accountant.
1. Talk to your accountant first. Experienced accountants understand exactly what it is that the IRS is looking for and why. Anticipating the documentation that will need to be gathered for your audit will save a significant amount of time. Speak with your accountant as soon as you receive a notice from the IRS to get her input on what will be required. If you decide together that your accountant will represent you in the audit, she — and not you — should speak with the IRS. Anything you say to an auditor can become an official part of your audit file and limit your accountant’s ability to manage the case.
2. Come clean. Tell your accountant everything she needs to know about your taxes. If you have missed claiming income or have claimed expenses you shouldn’t have, let her know. She will be able to advise you the best way to correct prior tax returns. The worst thing that can happen is that you remain silent on a matter and the auditor stumbles across it. This could cost you significant interest and penalties.
3. Organize and summarize. If you deliver your audit backup in plastic grocery bags for your accountant to sort through and assess, be prepared for a big bill at the end of the process. Keep your costs down by doing most of the legwork yourself. Find all of the documentation the IRS wants, then put it together in a sensible, organized way. If you have a pile of receipts to back up an expense line item on your tax return, or a stack of sales invoices to prove income, add them up and make sure that they total that number. Summarize the documents and provide an index to your accountant so that she can easily find the information she needs. Store everything neatly in a lidded and labeled plastic bin.
4. Don’t speak with the IRS directly. During the course of the audit, the auditor may call you to ask questions or get clarification on an item. Remember that your accountant speaks on your behalf. Direct any inquiries to your accountant, even if you know the answer and it appears to be an easy question. Having one person with a consistent message handle the audit can reduce confusion and prevent the auditor from expanding the audit because of something you said.
IRS audits aren’t fun, but they can be easier if you work with your accountant to make her job easier.