Things to Remember About Tax Audits and How Your Business Can Survive Them
The word “audit” creates fear in even the most genuine and honest of taxpayers – and with good reasons! Unless you are well ahead with your taxes after using a calculator (here is a FICA calculator), the news of an audit is a little worrying. Most people get nervous about the prospect of an audit and are in need of tax audit help. However, there’s less to worry about than you think.
Why Do You Get Tax Audited?
The truth is, you have fewer chances of being audited. According to a report by Greg Iacurci of CNBC, about one of 220 taxpayers was audited in 2019. This is less than 0.5 percent of tax returns filed. However, if the IRS decides to perform an audit on your returns, you want to have an IRS audit defense lawyer on your side. Also, a tax audit can happen to anyone. In most cases, they happen on either side of the income scale. This can range from the extra wealthy to the poor and the middle-income earners.
Paperwork Audit for Your Business
As a business owner, consider doing a paperwork audit. This is because the IRS only needs some missing paperwork. A paperwork audit is conducted by mail. In short, this means it’s you submitting documents to back up your federal tax return. This tax audit type involves simple issues such as alimony, unreported income, education credits, dependent claims, etc. The IRS also issues a strict deadline on this type of tax audit. Ensure you stick with the given deadline and get your paperwork submitted on time.
Have Your Records in Order
The IRS can impose penalties on your business for incorrect records. Organize your records by relevant tax year and type (income, pensions plans, expenses, etc.). Ensure every record the IRS requires is available. Ask for bank or credit card documentation from vendors. If you don’t have the records, don’t make them up. Make an effort to remake lost or damaged records, and remember to document your efforts. For instance, if there was a fire in your office, document your efforts to remake your business records. You’ll also need to show that you did a backup of records.
Never Lie to Tax Auditors!
Lying to an IRS auditor is a federal crime. Be honest and present the relevant records to the auditor. The IRS auditor will know if you’re lying or trying to conceal something. If the auditor suspects you’re lying or concealing records or even money, they can contact a third party such as family members or business partners. Next, they’ll question them to get the information they want.
Consider Filing Your Taxes Electronically
Here’s a myth: you’ll get audited if you file taxes yourself instead of hiring an expert. The truth is, you have no reason not to file taxes by yourself, especially if they’re not complex. However, filing on paper will likely get you in trouble. Why? It increases your chances of making errors. The IRS reports that the error margin for paper tax returns gets to as high as 21 percent. If you file electronically, the rate is less than 1 percent. If you are handling your return, consider filing electronically.
Managing an IRS Audit
How the IRS auditor in charge of the EDD tax audit process (if that’s what you’re currently undergoing) perceives you can have a considerable impact on the outcome of your audit. Depending on how the IRS chooses to conduct the audit, ensure you’re honest, professional, and cooperative. If it’s an in-office audit, be prepared before meeting the tax auditor. Also, try and establish deadlines early. The IRS wants its agents to complete audits within three months. If your case isn’t problematic, it motivates your auditor to close your case early.
What Happens if You Don’t Have Receipts?
As a business owner, the tax auditor will want to check your deductions and business expenses that you claimed. Sometimes, the auditor may want to check past documents, and you might not have receipts for such expenses. If the receipts are lost or destroyed, you can still show you paid specific amounts. You can present bank statements which show the correct figures. The statements should be accompanied by information from the parties who received the payments.
Most people don’t feel comfortable dealing with the IRS. However, you don’t have to worry and lose sleep over a tax audit. Take the appropriate steps to ensure you have every record the tax auditor wants. Also, consider working with a tax professional to help you prepare for an audit. What’s more, you can even meet the auditor together with your tax expert. These professionals will advise you and offer recommendations to deal with your type of situation.