IRS
Audits
If
you receive notice that the IRS is auditing your business,
don't panic, talk to the auditor only enough to refer
him/her to your tax professional, and get organized.
Just because your income tax return
has
been selected for audit, doesn't mean "they are
out to get you". It could mean that the computer
has selected your number for audit. Perhaps, your business
is part of a program to "test" compliance
in the industry. Maybe a competitor or disgruntle employee
"squealed" on you. The IRS is suppose to tell
you why your return was selected for audit.
Why
Did Your "Number" Come Up?
When income tax returns are filed in the IRS Service
Center, the information on the return is put into the
computer. Each return is assigned a numerical score
that is arrived at by determining how far above or below
the average each of your deductions are. Each deduction
that you have taken that varies from the norm is added
together and the total amount determines your numerical
score.
The scoring system is a secret but experience
tells us what makes the score go up:
Low gross profit margin
High auto expenses
High business use of autos
Number of autos used in business
High travel and entertainment
Little or no profit from business operations
Recently, interest expense has become a high-risk audit
item. In 1986, the deductibility of personal interest
began to be phased out. The IRS is auditing interest
on businesses to assure that it is business and not
personal interests. Before long, they will be enforcing
those complicated "interest tracing rules."
The higher the number, or the more your deductions vary
from the norm computed by the IRS, the greater the chance
of error on the return. Therefore, returns with higher
numerical scores are the ones more likely to be audited.
You Ought To Know
It is also your prerogative to ask why your return was
selected for audit. Even though the bulk of the returns
audited are selected because of a high numerical score,
other criteria for selection include informants, your
relationship to another taxpayer who is being audited,
being part of a special groups that has been singled
out for auditing, or being part of an IRS project such
as the auditing of all employers who use contract labor.
Kinds
Of Audits
There are four kinds of IRS audits.
Correspondence Audit is a letter from the IRS Service
Center requesting that you send in copies of your canceled
checks and/or receipts in order to verify certain deductions
on the return. This type of audit is reserved for small,
simple tax returns and most likely your business will
not be audited in this manner.
The notice of an office audit also arrives by mail.
The letter identifies specific items on the return that
are in question and requests that you or your representative
to bring certain documents to the local IRS office for
the auditor's examination. If your business is a small,
sole proprietorship with sales under $500,000, you may
be subjected to this type of audit.
With a Field audit, the IRS agent, personally, will
call the owner/president/general partner and notify
him/her that the return has been selected for audit.
This type of audit is called "field" audit
because the agent will want to conduct the audit at
your place of business rather than the IRS office. Most
incorporation businesses and partnerships are audited
in this manner. During the initial telephone contact,
the agent will be asking for the following:
To interview the principals
To arrange a date(s) to be at your place of business
To determine where the records are located
To provide a list of records that are to be made available
It is crucial that during a field audit, you have representation.
The IRS agent is instructed to interview you and go
to your business so that he/she can ask detailed questions
about business operations and see the business facility
first hand. We who handle IRS audits regularly call
this a "fishing expedition." Your representative
will attempt to buffer you from this type of questioning
and probing. More than likely, your representative will
attempt to have the audit conduction in his/her office
rather than your business.
At
Penney and Associates, we are committed to providing
the best possible service so your law related needs
are handled with the utmost professionalism.
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