– Charley Moore is the founder and chairman of Rocket Lawyer Incorporated. He advises both early stage companies, large enterprises and their investors on strategic partnering and corporate development strategy. The views expressed are his own. –
Getting a letter from the IRS is enough to instill fear and trepidation in the minds of many small business owners. Opening the envelope to reveal a tax audit notice can be the thing of nightmares. After the panic attack subsides, there are things you can and should do to prepare for a tax audit. It doesn’t have to be as intimidating as it sounds, as long as you take it step by step.
1. Find out specifically why your return is being audited.
While the IRS is supposed to tell you why your return was selected, if they don’t, it’s up to you to ask. Your taxes can be audited for a variety of reasons:
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specific activity on your return, such as cash wages, 1099 and W-2 forms that don’t match your reporting, high deductions relative to your income, reports inconsistent with previous years, etc.
related examinations, where your report involved transactions with someone else who is being audited
automatic flags, where computer programs find outlying “scores” on returns (ex: above average withholding)
random selection
Once you know what you’re being audited for, you can narrow your focus and start gathering the relevant documents.
2. Find out how the IRS is conducting your audit.
There are different types of tax audits, each with their own requirements. Knowing how you are being audited will help you determine what documents you need, where to send them, and whether you need a tax lawyer. Here are the ways the IRS conducts tax audits:
