Tax Audit Survival Guide: How to Get Through Your Worst Nightmare

Tax Audit Survival Guide: How to Get Through Your Worst Nightmare

by Brendon Pack, October 2019

A tax audit is perhaps the scariest event a small business might face. Think about it—prying auditors examining your books with magnifying glasses, doling out hefty penalties for every inconsistency they find.

 How to Get Through Your Worst Nightmare

Luckily, that doesn't have to be the case. If your business faces an audit from the Internal Revenue Service (IRS) or another tax authority, don't panic.

What to Know

While tax audits are undoubtedly serious, they aren't the nightmares you may have imagined them to be. With enough preparation and the right attitude, you can survive a business audit. But it all starts with the right mindset and knowledge. Make sure you:

  • Know your rights. You have specific rights as a taxpayer that the IRS is obliged to follow. Make sure you understand these rights before you begin the audit.
  • Stay calm. The surest way to have an audit finding go against you is to be angry or resentful. Being calm, considerate, and helpful will make the process with your auditor go much more smoothly.
  • Stay focused. Make sure you spend an adequate amount of time preparing for your audit. Give your auditor your full attention, and provide relevant documentation when asked for it.
  • Know your tax laws. Prior to your audit, you should have a full understanding of the tax issues in question. Be certain to know how any relevant deductions or tax computations work.

If your business is selected for an audit, the IRS typically contacts you somewhere between seven months to a year after your tax filing. However, audits have been known to happen many years after filing.

Once you receive an audit letter, you have 30 days to respond. Don't ignore this letter or the IRS might automatically rule against you and follow up with a bill for the adjusted taxes.

Keep in mind that it's okay to ask for an extension, especially if you're having difficulty organizing documents or replacing missing ones. Asking for an extension might work to your advantage. With additional time to prepare, you can come in with all your ducks in a row.

How to Prepare

When required to come into an IRS office, some business owners think the best strategy is to show up at the door with a bankers box of receipts, dump them on the table, and let the auditor do all the work. Unless you genuinely want to get on the bad side of your auditor, this wouldn't be a very wise move.

Your best strategy is to be as organized as possible. Make sure you have copies of all your documentation, especially receipts and records, to corroborate your deductions. In this way, you'll show the auditor that you have a good handle on your business finances. If they find an error, they may chalk it up to a one-time mistake and not to a pattern of sloppy behavior that warrants further investigation.

What Records to Bring

Being organized is good, but don't include any documents that aren't directly related to the audit. Your audit letter should tell you what to bring. If the auditor asks you about another line item on your tax return, you can truthfully say that you left those documents at the office. The auditor may drop their interest right there.

What to Expect

No doubt, you'd like for your audit to be over as quickly as possible. However, the length of an audit varies depending on several factors, including:

  • The type of audit
  • The complexity of the issues
  • The accessibility of the information requested
  • Your availability and the auditor's availability in scheduling meetings
  • The time it takes the auditor to reach a finding
  • Whether you agree or disagree with the outcome

Most mail and office audits last between three to six months. If the IRS comes onsite to your business, you can expect the audit to wrap up within a year.

How to Avoid an Audit

While audits aren't always avoidable, the best way to steer clear of one is to make as few errors as possible on your tax returns. Hiring a tax accountant can ensure that your business tax returns are properly filed on time. A tax accountant can help your business take advantage of all available tax breaks while lowering the risk of an audit.

But if your business is confronted with an audit, an experienced tax accountant can help you to better prepare for one. Many accountants will represent you in front of the IRS or other tax authority. The more serious the tax issues, the more important it is to have a professional on hand to represent you. A tax accountant can make the audit process go much more smoothly while protecting your rights as a taxpayer.

The key to remember is that, as frightening as an audit is, it's also not a terrible as it may seem. By understanding the process and preparing for it, your audit doesn't have to be the stuff of horror movies.