A primer on preparing for an audit by a governmental agency
There are few words that strike such fear in the hearts of individuals and businesses all across America more than the word “audit”. It can send chills down your spine, and leave you feeling helpless, confused, and filled with anxiety. The good news is that the process is generally not as bad as you might guess…if you follow a couple of general rules.
What type of audit?
First it is important to determine what type of audit you are under. There are many different types of audits, such as IRS income tax audits, IRS employment tax audits, State income tax audits, State sales/use tax audits, Employer Bureau of Workers’ Compensation audits, Unclaimed Funds audits, and local municipality income audits. Even within a type of audit, for example an IRS audit, there are many different types. Over half of IRS audits are simply what is called “correspondence audits” which means that the IRS wants to verify some information with you. In other situations, you will receive an invitation to meet with an IRS agent to discuss the tax year under examination. “Field audits” are performed by Revenue Agents and are conducted either at your home or office. “Desk audits” take place at an IRS Office with a Tax Compliance Officer. In any case, there is generally no need for panic, but there are certain steps you should follow. This article will focus on IRS audits, but the general concepts apply to other types of audits as well.
First, don’t ignore the letter
When you receive an initial letter indicating that you are being audited, you must respond. Ignoring the inquiry is the worst thing that you can do. The issue will not go away. While you should write or call the agent as soon as possible, you do have some leeway; and you can ask for additional time to gather the paperwork and other forms – within reason.
Second, decide whether you need representation
As discussed above, many times the letter you receive is a simple request for information (such as a copy of a 1099 Form). In that case, you probably do not need to contact your CPA or attorney. If the agent’s requests are more than just a basic request for a copy of tax reporting form, you will want to contact a qualified professional (CPA, attorney, etc.) to help you with responding appropriately. Your CPA or attorney will be able to represent you in meetings and in providing information, provided that you sign a Power of Attorney form authorizing them to do so. This ensures that your responses to the agent are postured in such a way to offer you the most favorable outcome possible.
Third, answer the inquires fully (and to the best of your ability)
Some audits are random; but most of the time the IRS has very specific questions it wants answered, and they will request backup and documentation accordingly. So it is important that you give them the information that they request and answer all of their questions fully. This is another reason to engage a qualified CPA or attorney at the beginning of the audit process. The qualified professional will already be versed in dealing with the IRS, and will know what to do and what not to do.
Finally, negotiate and appeal (if applicable)
This is arguably the main area in which the CPA or attorney will earn their fees. Your professional representation will know the law, and will be able to advise you if the agent’s findings are correct or not or if there is room for negotiation. It is best to reach an agreed upon settlement with the agent at the examination level, and therefore not have to take the case to appeals, but sometimes appeals are necessary. Your advisor will know the best way to handle these types of situations.
Overall, it is generally better to get professional advice early and often. Trying to “go it alone” can really cost you. If you find yourself in an audit situation, take comfort in the fact that Clark Schaefer Hackett can help you in many cases. Give us a call. And let go of the fear.
Brittany Lawrence is a Tax Manager at Clark Schaefer Hackett and Fred Francis is a Senior Accountant at CSH specializing in IRS controversies. Both Brittany and Fred are members of the firm’s Professional Services Provider Industry Group. They can be reached at 937.226.0070 or [email protected] or [email protected].