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Tax audits- what to do (and not do) in a tax audit
1. Tax Audits - What to Do (And
NOT Do) In A Tax Audit
2. The IRS uses a "point" system to pull taxes for audits.
That means that if you got away with heavy
expenses in one line item (marketing expenses) for
one year you were probably under their points for
that year, but it you do it again (and again), you'll
get audited for that next year - Because you reached
their "point" limit and "points" carry forward.
3. My experience in both the USA and Canada with the
IRS and CRA tells me that the systems are much the
same. These Do and Don't Tips are relevant for both
countries, but if you are unsure about an item or a
write off, then always check with your local
Accountant or tax agency.
4. You may also be selected for an audit at random
because something looks funny - That means that if
you have a cookie company and you spend $10,000
on office supplies and $2,000 on cookie dough then
you'd better have a real good reason why you did
that (first year in business only works for the first
year in business).... Also, if you had $5,000 in
Entertainment expenses and you own a dog
grooming salon, the same is true. Pets listed as
dependents - Don't go there.
5. If you reported all of your income and were reasonable
with your expenses then you are fine - Reasonable
and Related are the two most important criteria in a
tax audit.
Once you are notified that you are selected for an
audit, respond quickly. Do not put it off. They have
no intention of going away and it will irritate them
that you didn't take them seriously enough to
respond within a reasonable period of time. That's
when they begin to seek out your assets and yes,
they will find them.
6. It is perfectly acceptable to have your accountant
respond on your behalf. You will need to complete a
power of attorney form for that person to respond
for you and speak on your behalf, but it is well
worth the stress relief to let someone else (Who is
used to talking to revenue agents) speak on your
behalf.
Secondly, your ability to negotiate isn't compromised
if you contact them promptly.
7. Give them what they ask for. Do not volunteer
additional information. That's why sometimes it is
better to let a professional go or speak on your
behalf. You may be really proud of your business,
but it could cost you dearly to blither on about it.
Give them the fish they ask for, not trolling rights to
the rest of the pond.
They are only looking to substantiate the information
you provided on your return.
If a meeting is scheduled, try to make it at your
accountants office. You'll have less disruption and
your audit will probably go much better.
8. Be sure to review their adjustments thoroughly. Even
tax auditors can make a mistake (or two). If you
have some grey areas or places that need some
interpreting then be sure to negotiate those things.
At least make that attempt, because you may get
them to see your point of view - especially if there is
a history of something that you can recite as well.
Auditors don't ALL wear pocket protectors.
If you feel anxious or uncertain (in any way) then
consult a professional. Misunderstandings of rules
and tax laws are common. Your accountant
professional can help you explain those kinds of
things in "tax terms" so that they make better
sense.
9. This is worth repeating - Do not volunteer information
that is not requested unless it helps you. Ask what
they need and give (ONLY) that to them. You will
appear to be irritating and they may not have the
patience for you for that.
Do not feel like the auditor has the absolute final
"say." Ask your accountant or the auditor supervisor
if you feel that your information has not been
interpreted correctly according to the legislative
rules.
10. Do file an objection, or a 'not in agreement' with the
results as quickly as possible so that you are not
compromised by a past due deadline date.
Looking forward to a tax audit is like looking forward
to a root canal. These simple tips can help you take
the pressure off. Just follow the rules, don't go in
like a prize-fighter and aggressively argue your
points (If you are aggressive then you are just
running with scissors) and you'll be fine. That's how
to be a winner in an audit.
