Word to the Wise: What to Do If the IRS Comes Knocking
One of life’s great mysteries is why the IRS chooses to audit a particular taxpayer. While there are some red flags and anomalies that might draw attention to a tax return, many audits are random, and the audit rate is quite low.
In fact, the number of audits conducted by the IRS has decreased every year over the past decade. In 2017, the agency audited just 0.5 percent of all returns, 1.06 million in total.
However, if your company is selected for an audit, here are a few tips to consider:
Stay calm. Don’t panic if you receive an audit letter from the IRS. There’s no reason to think your tax position isn’t legitimate or that you won’t prevail.
The IRS’s Information Document Request (IDR) lets you know what the agency is seeking in terms of support documents relative to the audit. The IRS usually picks just a few issues to focus on. You should provide the examiner exactly what is requested—nothing more and nothing less.
It’s important to note that the IRS notifies taxpayers by mail and that the audit will be conducted by mail or in person. If you are receiving phone calls claiming to be from the IRS requesting payment or demanding sensitive information, these calls are not legitimate.
Contact your CPA. Your CPA has experience with IRS audits and should be your first call. It’s wise to give your CPA power of attorney so he or she can reach out to the IRS on your behalf and represent you during the audit.
Many CPA firms host IRS interviews for their clients at their offices and request that the IRS do their fieldwork there. Don’t be surprised if your CPA asks that you not be present at these meetings and to otherwise limit your contact with the auditor. This is for your protection: You can’t unintentionally incriminate yourself if you’re not doing the talking.
Expect your CPA to negotiate deadlines and requests for paperwork on your behalf.
Be cooperative. IRS agents are not graded on how many adjustments they make or how much revenue they recover. There is no quota. Rather, efficiency is their goal.
The best approach? Provide the agent with what is requested in an organized and timely fashion. A respectful and professional attitude will work in your favor.
If your business is cyclical, have your CPA let the IRS agent know when you’re going to be especially busy. The IRS is required to be flexible so they don’t interrupt your normal day-to-day operations. Their stated goal is to give the taxpayer a “fair, efficient and timely” audit.
File with confidence. As a taxpayer, you should take all of the deductions your business is legitimately entitled to. Don’t be afraid to do so. Just be sure to keep good records so you can provide support your numbers.
There may be areas where you and the IRS disagree on the tax treatment of specific issues. Often, resolution requires compromise. If some issues remain unresolved, you can appeal.
Keep in mind that not all IRS audits result in the taxpayer owing more money. While an audit can be intense, your CPA can relieve much of the burden and help you get through the process.