The answer is, ala the TV game show Jeopardy: “What is call your CPA.” That’s the response CPA Kristin Ingram hopes small business owners remember if they learn their company is going to be audited. Meanwhile, the chances of that happening are pretty slim, says Ingram, CEO of Connecticut-based Ingram Digital Media, Inc. “Currently, the overall audit rate is only one percent for business and personal taxes, so the likelihood is extremely low,” she says. Moreover, most audits are what she calls “correspondence audits,” meaning the IRS is requesting some information by letter. That happens when the IRS receives some information that does not match the data on the tax return, Ingram explains.
If, despite the odds, you or your business are the object of an IRS audit, there are steps to take to survive the ordeal. According to Ingram, those steps include:
Contacting your tax preparer immediately so they can review the letter sent by the IRS
Keeping paperwork organized is helpful so if an audit arises, necessary information is easy to find
Ingram says another important tip is to “make sure you have documentation for all deductions, including the mileage you claim on your taxes.”
CPA Mark S. Gottlieb, owner of Manhattan-based MSGCPA, offers suggestions for minimizing the likelihood of an audit. They include:
Filing taxes on time
Filing complete tax returns with the appropriate schedules and attachments
Being certain the returns are error-free and sans omissions
Gottlieb agrees that if notice of an audit is received, communicating with one’s tax preparer immediately is a smart move. He says a business owner should “instruct their tax professional to communicate with the taxing authorities to understand the issues” triggering the audit.
Even though it might be tempting not to want to communicate openly with the IRS, Gottlieb says doing so will help an audit proceed more smoothly.
“Start a cooperative dialogue in a timely and efficient manner,” he suggests.
Triggering an audit
According to Ingram, certain pronouncements in a tax return that seem illogical are one way to trigger an audit. For example, high deductions for a business where those benefits don’t make sense can be troublesome.
Another no-no is “repeatedly claiming financial losses in your business,” she says. At some point, says Ingram, the IRS will start to wonder if your enterprise is truly a financial endeavor or merely a hobby.
“It sound suspicious if you claim a loss year after year,” she says.
Gottlieb says the IRS employs another strategy for detecting potential tax fraud. The IRS, he says, maintains data on the financial pictures of what commonly-sized businesses in an area earn in a year. Wild deviations from those medians can trigger further investigations from the IRS.
Tami Kamin Meyer is an Ohio attorney and writer who tweets as @girlwithapen.